Digital money: what it is. And what are NOT

Economist Alexander Yakovlev commented on the opinion of the Central Bank of the Russian Federation on the review of IMF experts on the essence, classification and prospects of digital money.

Last summer, a new product appeared on the market, let’s give the word to the publication itself: “Econs” / Econs – a website about research on Economics and Finance, which is run by employees of the Central Bank of Russia.” This is how the editorial Board explains why it uses the brand of the Central Bank of the Russian Federation. And on July 25, 2019, Diana Asonova and Olga Kuvshinova (Econs) posted either an article, or a comment, or a translation of an analytical note rather than a review of experts from another respected organization, the IMF (international monetary Fund), under the title “the Rise of Digital Money” (the Rise of digital money) from July 15. The work of the Econs editorial Board is called “Digital money and what it is”.

It is comforting that “the Materials published on the site do not Express the position of the Bank of Russia”, moreover, “the Point of view and opinions of the authors of the articles are not the official position of the Bank of Russia and may not coincide with it”. At the same time, the editorial Board is curious (however, this is a translation) that “Bank deposits and cash will have to fight with the digital money of new private providers, banks will be able to respond to system challenges, and Central banks will have to form rules for the new future of money.” Why immediately “fight”? And why “be able to answer”? And most importantly, what is important and, apparently, the editorial Board is not in doubt, why “we will have to … formulate rules”?

In a small editorial article, only the main provisions of the 20-page IMF review are shown in small print, resulting in a translation “on a scale” of something 1: 10. We will try to analyze the article in “Econs” in its methodological part, not considering that it correctly reflects the review of experts of the International monetary Fund.

In fact, this is a program article of the Navy, at least an attempt to do so, and the intentions of the Foundation’s experts are the most serious, as they explicitly state:

“The purpose of this document is to provide a conceptual framework for classifying new digital money, identify some of its risks, analyze the implications, and propose policy options for Central banks to consider. The main focus is on the interaction of new forms of money and the banking sector, as well as financial stability and consumer protection.”

What is the position of Econs?

From the very beginning, we have a surprise waiting for us. The editorial Board considers: “To understand how new payment technologies and potential payment methods work, the review authors suggest categorizing them by five parameters, using the concept of a “money tree” (see the figure below): type [of money], technology of issue, cost, guarantee, nature (what happens in the calculations – the transfer of the object or the transfer of rights).” Thus, the editorial Board “moves” in the opposite direction. Why?

The Central place in the editorial article is occupied by ” Classification of payment means (“money tree”)”. After all, it is traditionally considered that a means of payment is one thing (the concept is much broader), and money is another.

In the original, this is also a drawing, but with a different “architecture”, which shows a structure, even two, both really resembling a tree. When translating, the design is rotated 90 degrees. Why the “drawing” has undergone such a transformation, we can only guess. We can only assume that this was done in order to preserve at least” visual ” unity.

The figure is more than remarkable, since the first level of classification is declared by two positions: as “right of claim” and as “object”. This characteristic (level of classification) is designated in the original as “type”, and in the translation of the editorial Board as “character”. I must say that the IMF experts have tried very hard to confuse readers with both definitions and construction in General, although they themselves Express dissatisfaction with the confusion in terminology.

So what is “character” or “type” on the first (left to right) level? In fact, this is a very peculiar, i.e. the most conditional reflection of the fact that there is modern Fiat money (their characteristic is “right of claim”), and on the other hand, there is both a vestige of commodity money in the form of cash (cash), and new forms of payment means (CBDC and cryptocurrency), which the authors of the figure define as “object”.

This becomes clear from the text, which for some reason does not exist in the translation of the editorial Board. So, “the first characteristic that defines a payment instrument is its type – the right of claim or object. The cash used to pay for coffee mentioned earlier is an example of a payment instrument as an object. A transaction is made immediately as long as the parties consider the object valid. Information exchange is not required. Another option is to transfer the claim to an on value that exists elsewhere. This is the case when coffee is paid for using a debit card. Using (swiping literally: conducting or checking) the card gives an order/order to transfer ownership from one person to another in relation to Bank assets.

This unimaginable “complexity” is also simply wrong, because in a cash transaction, “information exchange” is required and also occurs. You do not need to contact a third party or intermediary (usually represented by a Bank), but this is a completely different story.

So, the modern Fiat, or credit, monetary system in part (important: in part) of credit means of payment gives only the “right of claim” for money (important: for money), “existing elsewhere”, while” on the object “the transaction can be implemented directly in cash or “money of the future”.

I must say that in this triangle, in these “three pines” of the theory of money, the methodology of mainstream has been confused for a century. And he can’t get out.

In the original or IMF review, ” the second characteristic of payment means is their value. When classifying a claim, the question of whether the claim is settled in a currency at a fixed or variable cost is relevant.”

When translating, the editors violated the sequence of the original (hardly by accident), but it sounds like this: “the Next parameter is the cost: fixed or constant.”

At first, it is not even clear why this level of classification is needed at all. But, oddly enough, it is fundamentally important and is the main one – from the point of view of the theory of money, of course – so experts continue to confidently “confuse the tracks”, and the editorial Board of Econs preferred not to touch this issue at all.

Surprisingly, in the IMF version, when classifying the “cost” category, we are talking about the unit of account as a reflection (expression?) the cost is only for the “object”, but in transactions for the right to claim it [the account unit] as if it is not. But it is too early to be happy, for the object, the unit of account/accounting as an expression of value-Yes, it is shown, but only for “Central Bank money”. At the same time, nothing is said about the unit of account for cryptosystems of exchange, just there is a unit of account “other” (Other). And everything.

Fiat money in the IMF version, when defining the “cost” category, is represented by the concepts/categories “fixed value redemption” (fixed value redemption) and “variable value redemption” (variable value redemption).

I suggest that the reader try to understand what “cost” is by reading a thorough quote from the IMF experts ‘ review:

“The second characteristic of payment means is their value. For the purposes of classification of claims rights, the issue of whether claims are settled in a currency at a fixed or variable cost is relevant.

Fixed-value claims guarantee repayment at a pre-determined nominal [or fixed] value expressed in accounting units. For payments, this useful feature allows the parties to the transaction to easily agree on the value of the claim, which they exchange in the appropriate invoice/accounting units. For example, a requirement to a Bank in the form of deposits of, say, 10 euros can be exchanged for notes and promissory notes of 10 euros. These claims resemble debt instruments (interest on which may or may not be paid), which can be repaid on demand at face value. Other types of claim can be exchanged for a currency at a variable cost, that is, at the current market value of the assets that support this claim. Thus, here the requirements resemble investments in securities (equity-like instruments) with the risk of their increase or decrease. This parallel / analogy is intended to facilitate the presentation and does not necessarily imply that the payment means that we position in this classification as allegedly debt (debt-like) or as allegedly investment (equity-like), will be recognized as such in court. In order to classify payment instruments as objects, the relevant issue is their nomination in the national unit of account (unit of account) or in their own (their own). The concept / concept of repurchase / repayment of debt does not apply to means of payment as objects.”

In General, for the theory of money, it does not matter whether the exchange rate (transaction) is fixed or variable. It is important to understand what is changing for what and on what basis the exchange takes place, according to what rules it takes place. But experts, in my opinion, carefully avoid clarity and it seems that they do not always understand how to make ends meet.