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Navigating Digital Currencies: Consumer Expectations Versus Regulation Challenges

Money, the paradoxical combination of being both the bane of our existence and the object of all our desires, makes a bold statement. This notion gains further credibility, appearing more evident than the light of day. Even the Wise King Solomon once asserted that “money answereth all things.”

As the world seems to move beyond the novelty of Bitcoin, an enigmatic concept for many, the focus now shifts toward Central Bank Digital Currencies (CBDCs). Over 80% of Central Banks contemplate launching or have already initiated CBDCs. However, delving into the realms of Bitcoin and CBDCs requires addressing the fundamental question, “What is money?”

Throughout millennia, money has evolved as a human-made mechanism to solve the intricate problem of transferring purchasing power across time and distance.

Understanding money as a cultural technology might seem intricate, but like any other technology, it faces pressures, competition, and shifts in preferences, rendering it susceptible to obsolescence. As an integral part of the Seventh Kingdom of Life – the Technium, money’s history portrays an unending quest for an instrument that facilitates the consumption of “today’s wealth tomorrow,” particularly in the dynamic interplay of the Chthulucene and Capitalocene.

To fulfill its purpose effectively, money must perform three crucial duties:

  1. Storing Value: The value of money should withstand the test of time, unmarred by biological decay or excessive supply that leads to debasement. Just like a bushel of oranges retains worth only if unspoiled, a currency’s survival hinges on maintaining its value.
  2. Unit of Measurement: Money, like degrees, inches, and pounds, serves as a vital unit of measurement. For any measurement to be valid, standardization is essential, with stability in purchasing power over time and frictionless movement and settlement across space.
  3. Medium of Exchange: As a medium of trade, currencies might falter if they fail to embody the qualities of a good store of value and an acceptable unit of account. Portability becomes a critical factor, as money loses significance if others won’t accept it as payment.

Considering these purposes, it is intriguing to envision the world’s state when money was first invented some 40,000 years ago.

A Glimpse into the Past: The Barter System in the History of Money

Before the advent of money, barter served as the primary method of conducting trade. In bartering, goods or services were exchanged for other items of value. Although seemingly straightforward, mastering barter posed significant challenges.

The crux of the issue with bartering lies in the need for a double coincidence of desires to complete a trade. For instance, if a farmer seeks bread and a baker desires oranges, the farmer must first find a sugar dealer willing to exchange apples.

Beyond this obstacle, there are numerous other challenges, including the difficulty of finding willing trading partners. Additionally, one must consider the cost difference between a barter system and a monetized economy. With each additional unit of trade, costs escalate substantially. In a barter economy involving only oranges, sugar, and bread, nine different prices are needed, as opposed to just three in a cash-based economy. As the barter economy expands, trade complexity increases significantly.

The Advent of Money

Due to the complexities of bartering, among other factors, people all around the world independently embraced the concept of money as a technological solution. However, the specific items or objects that different groups of people used as currency varied significantly. Examples include the Clamshells of North America, the famous cowrie shells of West Africa, cacao beans in the Aztec empire, the Indian rupya, and many more. Essentially, people make money decisions based on six attributes, whether consciously or not. Consequently, when a material good or service possesses more of these attributes, it becomes better equipped to fulfill the three functions of money mentioned earlier.

Nonetheless, the capacity of a potential monetary source to meet these requirements may evolve over time. In other words, what is considered smart money today may turn out to be a poor investment in the future.

The Six Fundamental Properties of Money

Money possesses six crucial properties that dictate its effectiveness as a medium of exchange:

  1. Durability: Unlike perishable produce, materials like Gold retain their value over time due to their resistance to corrosion and deterioration.
  2. Scarcity: The principle of supply and demand applies to currencies, making rarer assets more valuable.
  3. Portability: While cash is convenient for everyday transactions, transporting significant amounts of gold can be physically demanding, affecting trade.
  4. Divisibility: Currencies like the US dollar can be broken down into smaller units, allowing for transactions of various sizes.
  5. Fungibility: The uniformity of currency ensures seamless exchanges, whereas varying qualities in other goods would require auditing in every transaction.
  6. Acceptability: The more these properties are met, the likelier people are to use the currency, creating a network effect that enhances convenience.

Amidst this backdrop, the rise of mobile money and e-money has positively influenced financial inclusion. However, concerns arise from regulatory issues related to near-monopolies held by mobile financial service companies, potentially impacting traditional commercial banking and consumer protection. Moreover, e-money’s risks, including dominance by large fintech corporations, hold significant consequences.

Global stablecoin initiatives highlight flaws in financial inclusion and cross-border payments in emerging markets and developing nations (EMDEs). While stablecoins may have benefits, they also pose unique challenges for these nations and require thorough evaluation. Several EMDE governments explore central bank digital currencies (CBDCs) to address these issues. Regardless of the issuer, digital currencies are both a payment system innovation and a form of virtual money. The key innovation lies in the ‘distributed ledger,’ enabling decentralized payment systems with diverse applications.

Considering the macroeconomic perspective, the adoption of digital currencies may significantly impact the unbanked population in developing countries. A risk-based regulatory approach is proposed, prioritizing financial market outcomes, global and local financial stability, and sustainable development while maintaining macroeconomic authority.

In the evolving global digital revolution, interconnected financial systems must protect consumers and economies from unintended externalities, ensuring a balanced and secure financial landscape.

Consumer Expectations

Consumer behavior is undergoing a transformation due to technological advancements, with a future expectation of mobile-first and fully digital platforms. Stablecoins hold the potential to gain systemic significance in a “host” jurisdiction, even if not in their “home” jurisdiction. This may present challenges for authorities in controlling the stablecoin structure and its impact, including on citizens. Such complexities can lead to conflicts of interest between “home” and “host” supervisors, hindering overall control, similar to challenges faced by supervisory institutes and crisis management groups in smaller economies.

For instance, if large-scale deployment occurs in the United States, risk management and effective payment oversight required by international standards to prevent unlawful use and ensure financial stability could be compromised. Additionally, concerns arise regarding consumer protection and recourse systems.

Initial impressions about stablecoins reveal regulatory gaps concerning consumer expectations of digital currencies. Several insights emerge:

  1. A need for internationally recognized taxonomy and regulations to identify and address regulatory loopholes and potential international arbitration, given that digital currencies like stablecoins may fall under multiple regulatory categories.
  2. The importance of evaluating coordination mechanisms to establish a comprehensive and consistent regulatory and supervisory approach in a fragmented environment.
  3. The necessity for data and information sharing among regulators to gain a complete understanding and assess the viability of collaborative arrangements.

Appropriate policies can mitigate many of these issues. Allocating additional resources for AML/CFT oversight, enacting legislation to minimize currency imbalances, and enhancing international coordination are potential solutions. Existing frameworks, such as the Principles for Financial Market Infrastructures (PFMI), can also address risks effectively.


The existing fiat monetary system has reached a critical juncture in its evolution. The breakdown of old financial structures has heralded the rise of unrestrained central banks, capable of generating money at a moment’s notice. This shift has paved the way for the next stage in monetary technology, which we believe will be realized through digital currencies.

Central banks have the vital role of maintaining the stability of the monetary system. Their responsibilities include safeguarding the value of money and ensuring the smooth functioning of the payment system, which facilitates money transfers. While we have seen spurts of monetary innovation in the past, the current wave feels distinct. Entrepreneurs are now striving to revolutionize not only payment methods but the very essence of money itself through innovative technologies. Cryptocurrencies, once viewed as digital novelties, have evolved into trillion-dollar assets with the potential to disrupt the global monetary system, leading to enormous real-world consequences.

Jack Dunam
Jack Dunam