The Evolution of Money – Part 3

Currently, government money (e.g., USD, ZAR, GBP) can only be held in two forms: physical cash (physical bearer instrument) or digital money in a bank account (digital registered instrument). Crypto currency is a new form of money that can be offered as a third form of central bank issued money. It is only a matter of time before central banks issue their own crypto instruments in the form of central bank issued crypto currencies (CBCCs).

(This is a continuation of my earlier blogs “The Evolution of Money – Part 1 ” and “Part 2 ”)

Currently, government money (e.g., USD, ZAR, GBP) can only be held in two forms: physical cash (physical bearer instrument) or digital money in a bank account (digital registered instrument). Crypto currency is a new form of money that can be offered as a third form of central bank issued money. It is only a matter of time before central banks issue their own crypto instruments in the form of central bank issued crypto currencies (CBCCs).

While the term CBCC may scare some in the regulated space as “crypto currencies” have become associated with unregulated tokens of value, the term merely differentiates it from the digital money that sits on commercial banks’ balance sheets as liabilities. Its name is derived from the cryptography that allows it to be a crypto instrument.

Just as no distinction is made between the value of a physical $100 bill and $100 in digital money that appears in an online bank account, so too would the value of $100 in CBCC be the same as the first two forms of money. The currency would remain the same. Only the form would change. The emergence of CBCC would not change the money supply[i] in an economy.

The introduction of a third form of regulated money, CBCC, would replace another form of money to keep the money supply constant ceteris paribus. Just as one deposits a $50 note at the bank which gets replaced by $50 in an online bank account, so too would $50 in CBCC have to replace some other form of money already in circulation. A central bank could easily set up a trust account to receive digital money (which it could take out of circulation) and issue a corresponding amount of CBCC to be sent to a wallet address of the digital money sender. In this way, the form of money as we know it could migrate from digital money to CBCC.

By migrating the predominant form of money in an economy to CBCC on a sovereign blockchain (a shared ledger under the jurisdiction of a central bank), a central bank could observe real time transactions in an economy to better understand the velocity of money and gauge the health of the economy on a daily or even hourly basis. Once a sovereign blockchain is created with a CBCC, other financial instruments such as bonds, equities, derivatives and even land and car registries could migrate to the same sovereign blockchain. This would allow the central bank to conceivably see the creation of all commercial bank assets in an economy in real-time, including the categorisation of those assets (e.g., collateralised loans vs. unsecured loans). Such transparency is invaluable to any central bank and would make decision-making more informed, timely and effective.

With a view of all transactions in an economy, anti-money laundering initiatives would be greatly enhanced. As it stands, payments from customers at a single bank are not always seen by the regulator as they are updates to that particular bank’s ledger and do not get processed through a national payments system, making the historical flow of money difficult to track. In contrast, a sovereign blockchain would allow the movement of money to be traced through a historical path of transactions on a single decentralised ledger.

Tax collection could be revolutionised through the use of smart contracts on a blockchain. Tax could be collected at the point of transaction in real time, changing the entire system of tax collection from “after-the-fact collection” to “in-the-moment payment”. Imagine every payment to a retailer being automatically split at the time of payment so that 10% (a sales tax for example) would be paid directly to a government address with no inconvenience or cost to the customer or merchant. This would significantly reduce the burden and cost of tax compliance for the merchant (as they would be paying their taxes automatically throughout the year) and improve collections for the tax authority.

This is just one example of how tax could be streamlined, but other examples abound – automated Capital Gains Tax when a vanilla asset is sold (the blockchain would have the history of what the asset was initially bought for and a smart contract could calculate the tax owed and pay both the seller and the tax authority in a single transaction); automated transfer duty on property sales; automated income tax payments when salaries are paid etc. The very notion of a withholding tax could become obsolete.

The blockchain would also allow the “codification of money”. Imagine a world in which the money paid into the account of the Department of Education could only be disbursed to accounts associated with schools or where money sitting in the government’s social grant account could only be paid to accounts of individuals flagged as eligible to receive those grants. The combination of the codification of money and the transparency that the blockchain allows would go a long way in combatting corruption.


[i] Money supply is defined as the total amount of monetary assets in an economy’s currency, the summation of physical notes and coins as well as digital money (the nuances of narrow and broad money definitions of M0, M1, M2 and M3 are not pertinent to the point at hand).

by Farzam Ehsani

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