Postmodern Monetary Innovations

Abstract

The Postmodern period is characterized by significant changes in the system of Monetary Relations, which concern not only technical innovations but also the very essence of Money. It creates a necessity to analyze Monetary Innovations with purposes to build a theory of their impact on the Monetary Sphere. Based on this, the author uses process tracing and event analysis methods (in particular, in the theoretical part of the work—theory-building process tracing). The main conclusions of the analysis were the conclusions that Financial Globalization logically requires the emergence of Global Money, but the problem is complicated not only by the fact that there are different options for such Money but also by the fact that Globalization itself develops nonlinearly and changes in the economic and political environment will also affect the choice of a Global Money Model. However, the dominant trend is the Destuffation of Money—that is, the disappearance of material (stuff) forms of money, and therefore, the real choice of such a model is between Cryptocurrencies (which represent the Free Market) and Central Bank Digital Currencies—CBDCs (which represent the Monetary Sovereignty of the State).

1. Introduction

The Postmodern period, which for various sectors of social life began in the interval from the early 1990s to the beginning of the new Millennium, was marked by the emergence of many technological and social innovations, which are described in a large number of publications. Our task in this case is not their detailed description, but an attempt to show how these innovations affect Money itself as an economic category and, accordingly, Monetary Policy. It is also important to find out the objectivity of the emergence of these innovations and the internal relationship.

We devoted a significant part of our scientific career (which began back in the late 1970s) to the study of these phenomena, when we noted the phenomenon of Money Destuffation—that is, the disappearance of material (stuff) carriers of Monetary Functions. Monetary innovations are considered in more detail in our two monographs—“Monetary Globalization” and “Globalization of Money”. In these publications, we focused on the times up to the Modern period. Now, let us try to look behind the curtain of Modernity and see the Future.

To do this, we will consider the phenomenon of financial globalization, the monetary role of securities, the replacement of material forms of money (gold) with electronic (virtual) forms, and the actions of central banks in this direction.

2. Global financialization

As noted by the Nobel Prize economist P. Kruger, economists in general have separate, unified views regarding the objective and nonideological foundations of economic knowledge. At the same time, significant disagreements begin as soon as the economics of business cycles and the practical steps to take in response to a business boom or bust are addressed. In our opinion, the essence of the problem arises from the fact that the world economy has entered a new era—the Era of Globalization. At the end of the last century and the beginning of the new century, globalization reached such proportions that there was no longer any area of social relations that was not covered by this process. But one of the most affected or covered (depending on the relationship to this phenomenon) globalization of the social and economic spheres is indeed, without a doubt, the financial system. And, even more than that, high indicators of internationalization of financial relations are considered not only as results of globalization but also as instruments of globalization processes. That is, in essence, the financial system and financial relations serve simultaneously as both objects and subjects of globalization.

As the American professor J. Kirshner noted, “after the Second World War, issues of the real economy—trade, especially liberalization, integration, and strategy—dominated the agenda, while monetary politics tended to pop up when its more severe pathologies (…) threatened to disrupt the smooth functioning of world trade. At the dawn of the twenty-first century, however, these roles have reversed. Money leads and the real economy must follow. From an economic perspective, this has an Alice-in-Wonderland quality to it: money, once the handmaiden of the modern economy, has become its mistress” ([1], p. 407).

One of the characteristic features of the current stage of globalization is that “expansion of horizons,” loosening of borders and restrictions, comprehensive unification, and universalization take place against the background of regional fragmentation and integration.

The widespread comparison of the volume of derivatives with the total volume of money in circulation, or, say, global GDP (in particular, mention is made of its 10-fold excess), draws attention. With reference to such assessments, conclusions are often made about the financing of the modern economy—that is, its state in which financial agreements (especially in international relations) develop a role, dominating the production and trade conditions, both from the point of view of determining the main direction of development of the global economic system. Financialization itself is an indisputable statistical fact. But from this fact, it is customary to draw a conclusion about the complete detachment of the financial sector from the real economy, the subordination of the real economy to the “financial international” (with further conspiratorial conclusions), the transformation of the financial sector into an “autostatic world of speculation,” and the further development of the financialized economy in the direction of its territory.

However, an influential or frankly negative attitude toward financial speculation continues to exist. Such views began to spread especially widely, it seems, after the publication of the book by the professor of the London School of Economics, the known specialist in the field of international relations, Sussan Strange “Casino Capitalism”. The author assumed that money is too important to be left to bankers and economists. Therefore, from her point of view, the meaning of the creation of “casino capitalism” occurs in the development of a financial system that increasingly affects the calming effects of democratic control. The main thesis of S. Strange was that the roots of the world economic disorder are monetary and financial and that the disorder did not arise by chance, but was actually nurtured and inspired by a number of the US government decisions ([2], p. 60). In particular, she pointed out that global financial markets create increased risks for all economic agents and argued that the volatility of exchange rates, interest rates, and commodity market prices (i.e., the main “underlying assets”) is not a “natural” phenomenon, but the result of certain political decisions that were made in the 1970s. It cannot be denied that the reform of the old and the formation of a new monetary system (both of individual countries and of the world) was formalized by appropriate decisions of political institutions (national and international).

However, it is obvious to economists that they did not happen at the whim of individual (even very influential) politicians, but were the result (sometimes forced, which made itself felt after a long political resistance—such as, for example, the rejection of the gold standard or the mechanism of fixed exchange rates courses) of changing the conditions (and, sometimes, the entire paradigm) of the organization of economic life and the operation of objective economic laws.

In fact, financialization is the result of the growing importance of finance, financial markets, and financial institutions for the functioning of the economy. First, the focus on shareholder value has led to significant changes in corporate strategies and structures that encourage outsourcing and disaggregation of corporations. Second, financialization has shaped patterns of inequality, new culture, and social change in society. At the heart of these changes is a major shift in the way capital is channeled—from financial institutions to financial markets through mechanisms such as securitization (the conversion of debt into marketable securities). Thanks to the combination of theory, technology, and ideology, financialization has indeed become a powerful force for changes in social institutions.

In our opinion, nothing apocalyptic, in fact, is happening, and comparing the volumes of financial transactions (including derivatives) with the volumes of production or trade in goods is completely inappropriate: After all, financial instruments are designed to serve various operations (not only buying and selling but also advance production, financing of research and design works, long-term investment, budget financing, insurance of numerical risks, etc.) and not only in the field of so-called real economy (production of goods) but also in the field of services (the volumes of which in developed economies exceed the volumes of commodity production), in the “knowledge economy,” in the information economy, and in the digital economy. As for the speculative nature of the financial economy, its size in relation to the “primary basis” isn’t so much impressive compared to speculations on commodity markets.

However, the probability of financial crises, which are accompanied by the transmission of the “crisis virus” and parallel events on the global capital markets, increases in the future due to the emergence and strengthening of the importance of not only new players but also new financial instruments. Among them, of course, the so-called derivative financial instruments play a special role (i.e., those that are formed on the basis of traditional or classic financial instruments, by means of “superstructures” on them of operations of the second and third order: the possibility of choosing a decision or the conditioning of actions by changes in certain parameters etc.), also known as derivatives.

Another qualitative change is gradually becoming the procedure for using international currency reserves. The classic option is that a significant share of foreign currency ends up at the disposal of central banks: They buy it on the domestic market from exporters and investors, thereby issuing their own currency. In the future, such reserves are used for the reverse operation. That is, the currency reserves of central banks act, to a certain extent, as “input and output channels of monetary circulation,” remaining as it were “frozen” during the intermediate period. Central banks and governments, as a rule, avoided the direct use of these funds on the world market: Since in exchange for foreign currency the corresponding amount of national currency was issued, such an operation could be considered as “reusing” foreign currency or carried out in the order of its purchase; the issue of the national currency would appear unfounded, unsecured, and, ultimately, inflationary. However, the presence of a permanent imbalance in international calculations (which was mentioned above) led in some countries to the formation of not just excessive, but extremely large currency reserves, which raised the question of the irrationality and even illogicality of their use in the previous way.

That is when the importance of sovereign wealth funds (SWFs) began to grow rapidly in international capital markets, although they have existed at least since 1953, when the first of such funds was founded—the Kuwait Investment Authority (KIA). But thanks to the increase in oil and gas prices, as well as the globalization and disproportionality of the world financial system, the number of such funds has grown significantly over the past decade and a half. In 2012, the size of the world’s 36 largest sovereign wealth funds reached $5 trillion and by the beginning of f 2020, almost 12 trillion dollars. The largest of them are established in the UAE, Norway, China, Kuwait, UAE, Qatar, South Korea, and so forth.

Thus, sovereign funds of national wealth, which are outside the management and responsibility of central banks and are aimed at solving economic problems directly related not to maintaining the exchange rate, providing financing for critical imports, or servicing external debt in emergency situations, but rather to the structural development of the national economy, fundamentally change the mechanism and priorities of the use of foreign exchange earnings.

Of course, the mentioned changes could not and did not go unnoticed, neither by the monetary authorities of individual countries nor by the center of the world monetary system—the International Monetary Fund. Created to manage a system of fixed exchange rates in which all currencies were effectively pegged to the US dollar, the Fund was forced to seek a raison d’etre for its continued existence in the new environment. And such meaning was found in the need to coordinate actions to ensure the financial stability of the world. Having released the genie of free movement of capital, the financial world has created the greatest threat to its stability. Macroeconomic indicators can no longer function as warning signs of approaching crises: The latter arise like tsunamis and are carried unexpectedly (from the point of view of old economic views) under the surface of the financial market to distant parts of the world. Thus, objectively, there was a need for the creation of “permanent surveillance stations” and “operational response center.”

Technological changes in the world currency system were added to the sectoral, functional, and institutional ones. The interdependence of currency markets has increased significantly with the development of means of communication and information processing. The emergence of nationwide payment systems that function in real time (Real Time Gross Settlement—RTGS), and later—their connection, in fact, into international financial networks (such as the EC TARGET system)—also seriously reflected on functioning of the world monetary system. After all, now the rules of currency regulation and control must take into account the possible impact of operations not only on the national economy. Accordingly, the impact of operations that take place in geographically distant markets should also be taken into account. This dependence was demonstrated by the crisis of 1997–1998, which spread like a bird flu from Southeast Europe to Latin America and Russia.

The causes of the latest world economic crises and the development of events in the world market indicate that in the new globalized economic system, the main role is not played by production, but by the financial sector, and the causes of crises are the overproduction not of goods, but of money. (In connection with this, the opinion about the emergence of “global financialism” has become quite widespread.)

The imbalance of the global economy model was manifested in high-deficit foreign trade balances of developed countries and, accordingly, a high surplus (surplus) of the current account in developing countries. The economic crisis of recent years has been largely caused by problems originating from the financial sector and rooted in the disparity caused by the hypertrophied role of this segment of the economy in developed countries. In this regard, at a certain stage of the development of the technological system, an overaccumulation of capital begins to be observed: The accumulated monetary capital cannot be invested in the expansion of production and trade, without leading to the next drop in the rate of return. As a result, there is a significant growth of stock markets and volumes of operations with derivative financial instruments of a speculative nature, which generate rapid, chaotic movement of “hot money.” World surplus capital from the trade and production sphere flows into the financial sphere and, accordingly, from developing countries (which need additional capital for the development of the real sector of the economy) to industrially developed countries. In the new globalized economic system, the main role is no longer played by production, but by the financial sector. And accordingly, the “crisis of over-financing” has replaced the “crisis of overproduction.”

In his book “Capitalism 4.0,” the famous English economist Anatole Kaletsky claims that capitalism is not a static set of institutions, but an evolutionary system that rethinks and reactivates itself through a crisis. The crisis, in his opinion, will create a new model of global capitalism, which will be based not on blind faith in market forces and not on excessive state intervention. This new kind of capitalism will be the result of four historical transformations: the end of communism, the opening of the economies of China and India, the information revolution, and the worldwide adoption of a system of paper (fiduciary) money ([3], p. 14). Of course, each of these reasons did not play an equal role in the transformation of the global economy, but the fact that these changes related to its very essence, its paradigm, seems to us beyond doubt.

Changes that occur in the system of debt relations are no less important. In particular, the exorbitant, at first glance, increase in public debt (which led to debt crises in the USA and some EU countries), most likely, is not so much a consequence of irrational or irresponsible government policies, but a reflection of the objective requirements of the modern economy, which is based on comprehensive credit development. Credit relations have long and deeply penetrated the very “living fabric” of the capitalist economy, creating its peculiar framework, and recently, quite logically, have become the basis of state finances. And that is why the fight against “excessive debt burden,” in the end, shakes the foundations of the modern economy, clearly demonstrating the need for a fundamental change in the approach to assessing the role and place of credit relations as a whole. In today’s conditions, the element of the new paradigm of the global economy is the “new normal of excessive debt”—such “nontraditional economic relations,” when “abnormality becomes the new normal.”

The above facts allow us to draw a conclusion about a significant change in the interdependencies of trends and factors that determine the very logic of the development of the modern economic system. Such a change in the paradigm of the global economy, which is still emerging and requires in-depth study, is most likely a multifactorial process, influenced by the overlapping of short- and long-term cycles, the emergence and growth of the importance of new, intangible factors of production (knowledge, social capital, credit relations, etc.), development and economic expansion of “newly created” markets, and so on.

The beginning of the 70s was marked by the rapid development of derivative financial instruments or, as they are called in the professional circle, “derivatives.” The derivatives are generally defined as contracts or securities whose prices or terms are based on the relevant parameters of another financial instrument that is considered the underlying one. The derivative itself is a contract between two or more parties to buy, or buy the right to buy, a new asset. A derivative determines its price based on fluctuations in the underlying asset, like stocks, bonds, currency, commodities, and different market indexes.

However, this definition of derivatives can describe the majority, maybe even the absolute majority of derivatives, but not all. As one researcher noted, a derivative cannot be defined as a financial instrument whose value is dependent (derived) from the value of a specific underlying asset, as such an asset does not exist in the case of weather derivatives, electricity derivatives, and the derivatives whose value depended on the outcome of papal elections in the sixteenth century ([4], p. 142).

That is, it is essentially about the fact that the “base asset” can act as simply any change, any probable event, and the derivatives themselves act as a bet on the fact that such an event will occur (or not occur) at a certain time. And it is this purely speculative aspect that most confuses critics of financialization. However, in fact, derivatives did not arise at all for the purpose of turning stock trading into a “financial casino.” On the contrary, derivatives are designed to limit all kinds of risks, to insure economic agents (traders, producers, and financiers) in case of an unexpected danger—from price changes to weather changes.

The results of the analysis conducted at the time by the outstanding Filipino specialist in the field of international finance, Prof. E. Remolona (Eli M. Remolona)—then an analyst at the Federal Reserve Bank of New York—testify that “the growth in exchange-traded derivatives arose primarily from the demand for liquidity-enhancing innovations and the growth in OTC derivatives from the demand for market-risk-transferring innovations. At least four broad developments gave rise to these demands. First, sustained shifts and temporary surges in market volatility differentially affected the demands for the various derivatives. Second, the emergence of important cash markets for government bonds and the growth of OTC derivatives fostered a demand for the liquidity provided by exchange-traded interest rate futures Third, interest rate risks faced by financial institutions and nonfinancial corporations created a demand for risk-transferring OTC interest rate contracts. Finally, the global diversification of institutional equity portfolios led to a demand for risk-transferring OTC stock index options” ([5], pp. 33–34).

That is, the obvious reason for the development of derivatives trading was the growing volatility of financial assets (the emergence of floating exchange rates, the activation of the interest policy of central banks, and the development of the interbank credit market with universal rates, such as Libor, orienting to the movement of business activity indices, such as the Dow Jones or FTSE100), which, in turn, required the use of market hedging instruments—that is, limiting losses from probable risks.

Unfortunately, like other phenomena, the spread of derivatives has another side: reducing some risks, they create other ones. So, considering the large number of risks that are usually associated with derivatives, central banks are concerned about the impact of derivatives on the stability of the banking system. Such considerations forced the famous international investor W. Buffett to call financial derivatives a “financial weapon of mass destruction” [6].

In general, the exact definition of the scope of the derivatives market is impossible due to the very specifics of these instruments. As Chris Skinner, Financial Services Club, said: “Assets are related to global markets and future contracts, derivatives contracts that are hard to put into a context that says in isolation, ‘this is what they mean’, because often they are interrelated with lots of other instruments and other geographies, and so that’s the concern. Investors are saying, ‘if the bank cannot show me exactly what the cost of these assets is going to be I cannot trust the bank’s accounting.’” (Today, BBC Radio 4, January 20, 2009) ([7], p. 13).

Experts often measure the volumes of the derivatives market in the same way that Ali Baba’s wife measured gold—with measuring pots: yes, EBRD experts in their official document simply speak of “hundreds of trillions of dollars” in the notional value of the derivatives market. Some experts, in general, are already talking about a quadrillion dollars.

A more detailed consideration of the essence and procedure of using derivatives is beyond the scope of our study (although this information can be easily found in numerous publications, manuals, and textbooks). We are more interested in the impact of the emergence and widespread use of financial derivatives on the sphere of money circulation.

3. “Strange money”

As we have seen, complex derivatives were created to reduce the riskiness of market operations in conditions of uncertainty and high price volatility. However, not all experts were convinced of exactly this role of derivatives. In particular, S. Strange argued that the derivatives boom actually made the system as a whole more unstable and prone to crisis. So, when such a crisis did begin in 2008, another British specialist, professor of the London School of Economics, N. Dodd (Nigel Dodd), called the toxic assets that became the “detonator” of the crisis explosion—“strange money.” True, N. Dodd did not directly mention financial derivatives, but drew attention to the connection between the financial and monetary systems (which was constantly emphasized by S. Strange) and to the fact that, in her opinion, banks do not create money so much as risks ([8], p. 178).

In this regard, the analysis and consideration of monetary policy perspectives is an important area of study of various factors of activity in the derivatives market. Although central banks typically control only one, very specific short-term interest rate, their actions affect the entire yield spectrum and other asset classes. And this, of course, determines the natural demand for instruments that can be used to protect against changes in central bank rates or other parameters of monetary policy. Short-term interest rate derivatives are attractive for both purposes because trading these instruments involves much lower cash costs for a given risk than borrowing and lending in the spot market. Moreover, they are also available to traders who, due to limited size or lower credit rating, cannot effectively operate in the spot market. However, money market derivatives are generally highly liquid, allowing traders to use them cheaply, quickly, and with minimal price impact. This feature provides a connection between monetary policy and the turnover of derivatives ([9], p. 65).

It is obvious that the first consequence of a more developed financial market for any monetary strategy is the ability to observe a wider range of asset prices that contain information about the current and expected state of the economy. In addition to inflation rates, interest rates, and exchange rate expectations contained in interest rates and futures prices, derivative prices also contain new types of information that a central bank can use to improve its monetary strategy.

At the same time, derivative financial instruments represent a form of “quasi-money,” and this leads to the conclusion that monetary policy has lost a certain influence on national liquidity conditions. However, central banks have excellent information and a broader and much more meaningful overview than individual investors and banks can get, which means they can still have a strong lead in financial markets.

And this potential is also confirmed by the development of operations with financial derivatives on the part of the central banks themselves. With the beginning of the new century, the central banks of the Scandinavian countries, the UK, and the European Central Bank began to use derivative instruments to hold currency in their reserves. In the second decade, the US Federal Reserve System joined them. By the end of the second decade, two dozen central banks of the world already used this practice.

The existence of a certain influence of financial derivatives on monetary policy is unconditional; however, by and large, the question is about recognizing derivatives as new money. According to D. Brian and M. Rafferty, derivatives, in fact, are “behind the scenes” money, which ensure that various forms of assets (and money) are not measured by state regulation (e.g., regarding fixed exchange rate) and with the help of competing forces. That is, derivatives lead to the merging of the categories of capital and money: they provide additional liquidity to capital markets by making all assets look like money and, on the other hand, represent money itself as capital. Therefore, the result is the elimination of the difference between the sphere of production of goods (the so-called real economy) and the monetary economy ([10], p. 153).

Such an opinion, in fact, can arise if we consider derivatives as a counterweight to the mass of commodities that play the role of their underlying assets. However, if you analyze the existing practice, you can make sure that the circle of such basic assets is quite narrow compared to the extremely wide assortment of goods (we are talking, mainly, only about basic raw materials). In addition, the absolute majority of futures contracts with the use of any derivatives does not end with the delivery of a real underlying asset, but only with the payment of a price difference (a premium or a fee for an option). There is no real balancing of the amount of derivatives and volumes, at least of the corresponding underlying assets (even taking into account the speed circulation of financial instruments).

The question of the connection of derivatives with the money supply at one time became the subject of a special study by a group of experts of the Bank for International Settlements (“Hannun Report”), who pointed out that “[t]he growing use of derivatives may have an impact on the stock of money balances, either by changing the demand for money services, or by transforming non-money financial assets which bear price risk into closer substitutes for traditional (risk-free) money, or by a combination of both. This can undermine the indicator function of traditional monetary aggregates. To the extent that the demand for money is shifting in an unpredictable way, the empirical foundation of monetary targeting is also called into question” ([11], p. 32).

Around the same time, a group of American scholars also investigated the problem of the consequences of the use of derivatives for the regulatory function of central banks. They supposed that in such case it was no negative impact regarding the control for monetary aggregates by central banks. “Nonetheless, to the extent that derivatives act to complete markets and provide information through more explicit prices, they may make it more difficult for a central bank to surprise the public” ([12], p. 8). Experts assumed that if commercial banks regularly use derivatives markets to hedge their risks in relation to interest rates, foreign exchange rates, and commodity prices, then the desired level of excess reserves in the banking system will be lower (than it could be without the existence of a derivatives market). Thus, with the increase in the use of derivatives, voluntary excess reserves will decrease, which, in turn, will leave banks with a greater opportunity for credit issuance, that is, will increase the money multiplier.

Central banks were also concerned about the complexity of the work on sterilization of the exchange rate, the effectiveness of which decreases in the case of the spread of the relevant derivatives.

And yet, according to U. Bjerg, “money is never just money,” since it is “characterized by a certain ontological uncertainty,” and “any monetary system is characterized by the interaction and transformation of various forms of money.” And in modern conditions, financial markets play the role of repositories for the circulation of post-credit money issued by certain international banks ([13], pp. 242–243).

4. From gold to cryptocurrencies

After the “Nixon revolution” with the refusal to exchange Dollars for Gold and the Jamaican Agreement, which canceled the peg of national currencies to gold, the question of the use of the “yellow metal” in the international monetary system as a whole and the fate of the official Gold Reserves “hung in the air.” True, the forecast of the famous chemist (and amateur economist) F. Sodi, expressed by him back in 1921 (“Demonetize gold and where will its value go?” No gold mine will work the day after tomorrow” [14]), did not succeed. Gold continued to have value—and not only for jewelers and electronics but also for financiers. However, now the problem was not to accumulate Gold Reserves, but to get rid of them with minimal losses to themselves and without causing panic in the Market. The main fear was that a quick “reset” of Gold Reserves would lead to a collapse of the market price, and the most affected would be those central banks that would not have time to sell off their reserves (and in fact none of the central banks would have time to do this). Main central banks even signed in 1999 the so-called Washington Agreement to limit their sales of gold.

However, in recent years, some countries have taken steps to return their gold reserves. In Switzerland, populist politicians came out with slogans of “saving Switzerland’s gold,” which found support among some citizens, who organized the company “Save our Swiss Gold” and managed to hold a national referendum on this issue. The referendum, which decided on the issue of increasing the Gold Reserve of the Swiss National Bank and increasing the share of the bank’s assets invested in gold from 7 to 20%, as well as on the prohibition of storing gold reserves outside the territory of the country (a large part of the Swiss gold reserve is kept in central banks England and Canada), was held on November 30, 2014. The Swiss National Bank and the government were against this, and the country’s population agreed with their opinion, voting in their majority (almost 78%) against such a decision. Finally, in mid-2019, it was announced that the Washington Agreement (which expired in September of that year) would not be extended, due to the fact that its signatories “no longer see the need for this agreement.”

Looking ahead a little (since we have not yet considered the process of Money Destuffation), it should be noted that the latest technological changes have not bypassed the gold market either, and as early as 1996 in the USA, the “e-gold” project was implemented in the framework of which electronic calculations were carried out based on gold bars and coins that the organizers of the scheme deposited in one of the commercial banks of Florida. Ultimately, the US authorities drew attention to the possibility of using such nonbank settlements for financial fraud and terrorist financing and in 2007 banned them in court. The following year, on the same grounds (making settlements without an appropriate license), e-Bullion’s exchange trading of “electronic gold” was banned in California. The Pecunix digital currency scheme (which was equal to a gram of gold) lasted a little longer: the use of registration in Panama and conducting operations in Switzerland made it less vulnerable from the point of view of legal requirements, but in 2014, the company “suspended” operations, and soon its organizers disappeared (together with all the information about the balances of their clients’ funds).

However, this did not stop the enthusiasts of “digitalization of gold,” and in 2015, the company BitGold Inc. was established in Canada (later renamed GoldMoney Inc.), which offers customers the ability to deposit gold into their “BitGold accounts” and then use those funds (or their value in local currency) to make mortgage payments or buy goods. In 2018, the Kinesis Money company was established in Australia, which introduced digital representations of gold (Kinesis gold—KAU) and silver (Kinesis silver—KAG) investment bars the following year. The bullion itself is stored in the company’s vaults, and its electronic representatives allow you to instantly buy, trade, send, and spend physical gold and silver worldwide. And in November 2021, California-based Asia Broadband Inc.—a resource company that focuses on the production, supply, and sale of metals (including precious metals), primarily in the Asian market—has announced the launch of its “gold token”: a digital currency backed by gold mined directly from its gold mines. The main goal is for the gold token to become the global exchange standard by gradually expanding the circulation of the tokens in the primary markets of North America and Europe and expanding globally to other markets.

However, as noted by authoritative researchers on this issue: “Although gold-backed private tokens already exist, they lack the credibility necessary to become reserve assets. Rather, a publicly issued gold-backed digital token can allow gold to benefit from the liquidity and fluidity of digitization while maintaining its important role as a source of value and a safe-haven asset. (…) However, at the moment, it is difficult to imagine any individual organization or central bank issuing a public gold CBDC” ([15], p. 18)—that is, an official digital currency.

Another thing is that some people hope for an increase in the demand for gold precisely for the purpose of making calculations—namely, calculations of a “shadow” nature, bearing in mind that the creation of digital currencies by central banks (which we will consider below) can deprive the movement of money of privacy and then businessmen will start to “enter gold” (just as some are already trying to “enter cryptocurrencies”) with the same goal—but this refers not so much to the theory of money as to the technologies of criminal business.

Thus, it can be stated that almost half a century after the Demonetization of Gold (the process of which was marked by the emergence of a double price of gold, the cessation of the exchange of the dollar for gold, and, ultimately, the abolition of the peg of currencies to the gold content), the “yellow metal” continues to play a prominent role in the global financial system. At the same time, its role has fundamentally changed, which, however, does not prevent its relative price stability and, even, a noticeable increase in the price of gold during periods of political and economic upheaval. Most likely, such a “shadow effect” of Gold on the global financial system will persist in the future. Unless the American space agency NASA plans to fly to the asteroid Psyche, which astronomers believe contains huge deposits of metals—in particular, platinum and gold, the industrial development of which (as some mining companies are already considering) could potentially transform every inhabitant of our planet for a billionaire, but at the same time destroy the entire global economy (which, of course, is another “horror story”, but…).

The Postwar (after WW II) period was characterized by the practical completion of the process of “Nationalization of Money”—that is, the establishment of full state control over Money Supply (which was reflected, first of all, in the nationalization of central banks). However, the end of the twentieth century was marked by a certain return to the practice of free issuance of currency notes (free banking), albeit on a slightly different basis. Today, there are more than 5 thousand such systems in 50 countries of the world. In Germany alone, after the transition to the euro (2002), 23 regional currencies were issued.

On the one hand, such systems contribute to the revitalization of trade exchange—especially on a regional scale and in support of small businesses—as they play the role of a system of consumer self-credit. On the other hand, they undermine the unity of the Monetary System of the state, not only leaving the central bank with a certain amount of Seigniorage (which is of no practical importance given the existing volumes of “alternative emission”) but also introducing significant confusion into the issues of Exchange Rate formation and Monetary Sovereignty (the obligation to use a single legal means of payment), complicating Interregional Settlements, creating opportunities for fraud and abuse that are outside the area of responsibility of official Monetary Authorities, and so forth.

Over the past few decades, a certain evolution of the models of additional currencies has taken place, which allowed to distinguish four generations of such Quasi-Monetary Systems (which, however, do not replace the previous ones, but exist in the process of continuous innovative development).

The first generation is nonconvertible systems; these are local exchange trading systems (LETS), which originated in the 80s and developed intensively in the first half of the 90s. They are large networks, often centered on specific organizations (e.g., Lets Link UK in Great Britain and Selidaire in France) and organize mainly cashless exchanges, or use paper money for a short period.

The second generation is formed by nonconvertible exchange schemes, in which the value of goods in exchange is often measured by the time spent on their production (time money).

The third generation consists of convertible systems that are aimed at solving specific economic problems, but since they also solve territorial problems, they can be classified as local currencies at the same time. Such additional currencies are pegged to national currencies by means of a fixed exchange rate, for which special conversion rules apply. The issuance of additional currencies of the third generation is ensured by the reserves of the national currency, while the currencies of the first and second generation do not have such security and are not convertible.

Fourth generation monetary system projects are complex systems in which local currencies play a major role. These projects (often called “green currencies”) focus more on environmental issues. They have a multipurpose nature, and local authorities are involved in their implementation. (For example, the NU Spaarpas project, launched in Rotterdam in 2002–2003, aimed at solving a whole set of problems, including increasing the consumption of locally produced organic products and increasing the recycling of waste [7, 16].)

In our opinion, additional money projects based on the use of the blockchain system could be attributed to a completely new generation. In particular, in May 2018, such a project called “Urban Economic Resource” (Recurso Económico Ciudadano—Rec) was launched in Barcelona, and its “currency” can be used using a mobile application or a bank card.

Thus, the system of “additional currencies” is connected to another system—the system of “electronic money.”

However, the influence of the new technology began to be felt in the monetary and banking sphere already at the end of the last century, although the words “banking technology” or “banking industry” sounded a bit unusual in the early 1980s, but even then, they reflected significantly new phenomena, because in the recent decades, significant social and economic changes have taken place, which have significantly transformed banking activity.

The idea of “computerization” of money circulation is based on previous developments in this field, which were based on the desire to overcome the shortcomings of cash circulation. And if in corporate, “wholesale” circulation, it was possible to do this long ago by means of simple bank entries on customer accounts, then in “retail circulation,” it remained a problem for a long time, because the replacement of “pure coin” with paper money tokens, including banknotes, promissory notes, or checks, only simplified the problems but did not solve them, until credit cards came along.

So, instead of representatives of a clearly defined (in accordance with the denomination) number of monetary units (banknotes, treasury tickets), “money devices” appeared, which represented money without its quantitative certainty, since they could embody any number of monetary units, depending on your electronic programming. The era of “electronic money” or, as we proposed to call it, the “Destuffation of Money” has begun—that is, the disappearance of the physically embodied (stuff) form of money signs.

Cash is now used less and less, and in countries such as Sweden or China, it has almost disappeared altogether, giving way to such digital payment systems as PayPal and Venmo (USA and Europe), Alipay and WeChat (China), Paytm (India), or M-Pesa (Kenya). Most of these fintech innovations are still tied to traditional banks.

In place of cash comes “electronic money”—according to the definition given in Article 1 of the directive of the European Parliament and the Council in 2000—it is “currency [monetary] value, in the form of a claim against the issuer, which: (i) is stored on an electronic device; (ii) is issued after receiving funds in an amount not less than the amount of the issued monetary value; (iii) is accepted as a means of payment by other business entities than the issuer.”

But over time, “Virtual” money was separated from the “Electronic Money” family. From the point of view of the Theory of Money, Electronic Money is the same credit or fiat money, only not in paper form, but in the form of a record on electronic media. But it is emitted by the central bank as a result of the refinancing of commercial banks and by commercial banks in the order of subsequent lending according to the principle of the money multiplier. After all, these are the same entries in the bank register (ledges), with the difference that now they are not read directly by bank employees, but by computer equipment—which is more convenient for both the bank and its customers but does not change the essence relations between them.

The Flooz and Beenz payment systems, which functioned at the turn of the century (or “thousand years”—if someone prefers), can also be considered the technological predecessors of cryptocurrencies. By the end of 2017, there were already more than 1200 cryptocurrencies but only a few of the main ones, and the most successful and demonstrative of them is “Bitcoin.”

At the end of the last millennium, Neal Stevenson’s novel “Cryptonomicon” was published, which describes how a group of mathematician programmers tried to create the world’s first cryptocurrency (fully electronic money protected by the most advanced cryptographic methods), facing resistance from world governments and big business players. And already in 2008, someone under the pseudonym “Satoshi Nakomoto” described a new cryptocurrency—“BitCoin” (“information/digital coin”). “We define an electronic coin as a chain of digital signatures,” he writes. “Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership” ([17], p. 2).

The “hash” itself—a message about the ownership of “Bitcoin” in the order of its emission (“mining”) or receipt of payment—performs the role of a “warehouse receipt,” which confirms the ownership of a certain product in the form of an intellectual product. At the same time, the “blockchain,” that is, the chain of all previous “hashcashes” of a given Bitcoin, contains in its algorithm all the previous “transfer inscriptions,” certifying the way of transfer of ownership rights from one holder to another. And thus, they are an electronic form of a payment document known as a “bill of exchange” (or “tratta”), on the back of which “transfer inscriptions” (“endorsement”) are made by each previous owner, which certifies the legality of the transfer of the right to a monetary debt to his successor. Thus, it can be argued that “Bitcoin” is essentially an electronic combination of “warehouse receipt” and “bill of exchange.” And its “price” is based on a speculative game, similar to options on various indices (Index Option), one of the types of derivatives (which are actually traded on the same exchanges as cryptocurrencies).

A relative innovation was the fact that the “central issuer” of electronic money “disappeared,” since the issue of cryptocurrencies can be carried out by each participant of the scheme by means of its “mining”—a process by which transactions are verified and added to the list of “transfer inscriptions “(“blockchain”). The process of “mining” involves building previous transactions into blocks and trying to solve a complex computational task. The participant who solves it first can put the next block in the chain of blocks (“blockchain”) and claim the reward. A reward that incentivizes “mining” and is “Bitcoin.” Since any person who has access to the Internet and the appropriate equipment can become a “miner,” the emission process is maximally decentralized, which, in fact, gives reason to say that the emission of “new money” is not under the control of only the central the bank and the state, and the financial system in general.

5. Central bank digital currency

In January 2018, a group of analysts of the Goldman Sachs, led by Zach Pandl, published a report in which the cryptocurrency was studied as money in the classical sense (“Bitcoin as Money”) and concluded that although Bitcoin can hypothetically be successful like the dollar or the euro, it is likely to face a number of fundamental problems. “In practice, Bitcoin and other digital currencies face significant practical obstacles to wider adoption, including potential government regulation and excessive volatility. So can Bitcoin succeed as a form of money? Theoretically yes, if it proves capable of facilitating low-cost transactions and/or providing better returns on risk-adjusted investment portfolios. However, in practice the bar looks high. The currencies of most developed market economies are already quite good at providing such monetary services. And if blockchain technology goes mainstream, as seems likely, the bar will look even higher. (…) The recent fluctuations of Bitcoin and similar cryptocurrencies demonstrate that they are too volatile to serve as money. Volatility will likely have to drop dramatically (either naturally or through widespread adoption of cryptocurrencies designed to better stabilize purchasing power by regulating supply) before we see more widespread adoption. (…) Nevertheless, Bitcoin (and cryptocurrencies in general) can offer viable alternatives in countries and corners of the financial system where traditional monetary services are inadequately provided” [18].

Actually, “caught up” by the last remark, some publications, in pursuit of “hot news,” declared that Goldman Sachs analysts “recognized cryptocurrencies as real money,” or (in a milder form) that “they can be real money,” not particularly paying attention to the fact that the conditions for such “advancement,” in fact, require a fundamental change in the very essence of cryptocurrencies. Just as other analysts of the Goldman Sachs said that gold (which, they emphasized, is no longer real money) is better than cryptocurrencies due to its durability and intrinsic value [19]. Therefore, Z. Pandl explained in a separate email that cryptocurrencies will need to “clear many regulatory hurdles before gaining wider acceptance.” But the fact is that regulators—first of all, central banks—are in no hurry to remove these obstacles.

The German Bundesbank explicitly states that “cryptoassets” are often misunderstood as “cryptocurrencies” or “cryptomoney” In fact, these are just private digital “tokens” that are created and used on computer networks. Indeed, the term “cryptocurrency” that is often used sounds like “official money.” But this is not the case: There is no state central bank behind crypto-assets; there is no legal framework and state regulation that guarantees stability and acceptance. Therefore, there is no law that requires anyone to accept payment using a crypto asset, or to be able to exchange crypto assets for official currency. “Crypto-assets perform monetary functions only to a very limited extent. Their acceptance as a means of payment is extremely low. There are hardly any outlets where you can actually pay for it. Prices are also rarely expressed in cryptoassets, so they cannot be used as a unit of account. Due to strong price fluctuations, cryptoassets are hardly suitable as a reliable means of storing value. This means that crypto-assets are primarily a tool for speculative investments” ([20], p. 17). The position of central bankers on this matter was very clearly expressed in Davos (2017) by the Deputy Governor of the Central Bank of Sweden, Cecilia Skingsley, who stressed that cryptocurrencies do not meet the criteria to be called money [21]. In March 2017, Japan revised the part of the Banking Act that includes the wording of virtual currency. Some media reported at the time that the “virtual currency law” gave it the status of legal tender in Japan. But in fact, the law defined Bitcoin and other virtual currency as a method of payment, not a legally recognized currency or legal tender.

Consequently, states and central banks continued to treat cryptocurrency with suspicion. Thus, one of the biggest obstacles on the path of “cryptocurrency” to real electronic money was the lack of trust, the importance of which was spoken about in September 2017 at the London Forum of Official Monetary and Financial Institutions Forum (Official Monetary and Financial Institutions Forum), by a member of the Executive Council of the Bundesbank, K- L. Thiele (Carl-Ludwig Thiele). Speaking at the same forum, the then head of the IMF, K. Lagarde, urged bankers to pay more attention to cryptocurrencies. At the same time, she warned that in some countries with weak institutions and an unstable national currency, there may be an increasing use of virtual currencies (as an alternative to accepting foreign currency—say, the US dollar). Christine Lagarde called it “Dollarization 2.0.” Some enthusiasts, again, even viewed this statement as “recognition of cryptocurrency” by the International Monetary Fund. However, in fact, this appeal was connected with the fact that K. Lagarde advised not to pay attention to Bitcoin at all 2 years before that. Now, she simply suggested that central banks not recognize cryptocurrency, but take a closer look at blockchain technology.

Speaking on the same occasion a year later, in November 2018, at the Singapore Festival of Financial Technologies, Christine Lagarde was already convinced that the problem actually lies in new demands for money, as well as the main goals of state policy. And as she emphasized, “money itself is changing” ([22], p. 7). In this connection, the question naturally arises about the further role of the state and central banks in this new monetary landscape. Some are even suggesting that the government back down, and electronic money “providers” claim that they are less risky than banks because they do not lend money. Instead, they keep customer funds in custodian accounts and simply make settlements on their networks, which raises the question of trust. And therefore, according to Christine Lagarde, the state should remain an active player in the money market, and central banks should issue money in a new digital form—in the form of state “tokens” or, perhaps, accounts maintained directly in the central bank and accessible to people and companies even for retail payments. In this case, unlike the electronic money of commercial banks, the digital currency will be an obligation of the state, like cash today, and not of a private firm (similar to cash in today’s conditions).

Meanwhile, blockchain technology, which is the basis of Bitcoin, has spread quite widely around the world. What can be the benefit of issuing banks from blockchain technology? In fact, it allows traditional national currencies to be issued in such a way that their further movement, each transfer of new central bank money from one owner to another becomes transparent and even controllable. Especially considering that with modern technologies, it is not difficult to make even each banknote “marked” with a barcode. So, the dream of complete anonymity of transactions is more like the prospect of being completely “under the hood” of “Big Brother.” Sweden and China were the first to announce their desire to issue their own “cryptocurrency.” Of course, if such a “currency” is issued by a central bank, it will not be “crypto” (by definition) at all. These will be “fiat blockchain money” based on the idea of cryptocurrencies.

That is, central banks took quite seriously the need to develop their own digital currencies (Central Bank Digital Currency—CBDC), which would ensure direct access of customers (including individuals) to electronic payments among themselves (i.e., in fact, to the creation of “electronic cash” as opposed to the already existing “electronic money” of commercial banks). One by one, they began to announce their intentions to create their own “e-currencies”—which were sometimes mistakenly announced as their own “cryptocurrencies.” Of course, we were not talking about cryptocurrencies, which, by definition, cannot have an official issuer, and its holders - to be entered in some official list (ledgers), because the “crypto” itself means that the “mining” is carried out according to some “secret” formula and its holders remain completely anonymous. Rather, what was meant was a certain competitive alternative that should meet new customer demands/needs and eliminate threats to Traditional Monetary Systems from Cryptocurrencies. More precisely, simply destroy cryptocurrencies.

However, this, in fact, would mean a transition to a fundamentally different system of crediting and, accordingly, money issue—from a system of partial reservation to a system of full reservation, or the so-called “narrow banking.”

Two main forms of the CBDC issuance can be distinguished (based on a detailed Review of the Bank for International Settlements) [23]:

• R-CBDC (Retail CBDC)—for retail (general purpose) payments

• W-CBDC (Wholesale CBCD)—for wholesale (special) payments.

Technologically, the issuance of digital currencies can be carried out either

1. in the form of issuing digital signs/tokens (i.e., in the form of an electronic monetary obligation of the central bank, which can be used in retail payments by analogy with cash), or

2. in the form of accounts on current accounts.

The key difference between token-based and account-based money is the form of verification required for an exchange transaction: the use of token-based money depends on the payee’s ability to verify the validity of the payment token, while the use of account-based money depends on possibilities of identification and authentication of the person of the account holder.

Different models of retail CBDCs are offered, in which the following institutions participate:

• A central bank that can issue, transfer, and redeem digital currencies.

• Authorized or privileged institutions are intermediaries that, in cooperation with the central bank, store digital currencies and carry out their transfers. (Mostly, these are banks or payment service providers that have access to the central bank’s wholesale settlement system).

• Institutions or persons that can interact with intermediary institutions, storing digital currency and conducting payment transactions with it.

In the first model, the digital currency represents monetary claims to intermediaries (banks), and the central bank only monitors the state of accounts for wholesale payments. Such a two-level model is sometimes called “synthetic” ([24], p. 1).

In this case, the second R-CBCD model can be called straight, or single-level. In it, the digital currency is a direct right of monetary claim to the central bank, which keeps records of all balances based on the calculations of retail payments and updates them with each transaction.

A hybrid, third model is also possible, in which the digital currency represents direct monetary claims to the central bank. In this model, payments are processed not by the central bank itself, but by financial intermediaries.

If retail systems can, in principle, replace or complement existing payment systems within countries, then CBDCs for wholesale settlements can replace traditional mechanisms of interstate settlements, which are currently carried out on the basis of correspondent bank accounts using national real-time gross settlement systems (RTGS) and the interstate system of conversion currency operations (continuous linked settlement—CLS).

As for wholesale systems, at least three main models can be distinguished: (1) a system with nonconvertible digital currency, (2) system with convertible digital currency, and (3) system with universal digital currency (U-W-CBDC).

In each of these models, a tokenized form of monetary obligation of the central bank is used for wholesale interbank payments and settlement operations at the interstate level. Of greatest interest is a system with convertible digital currency, where central banks sign an agreement that allows participating banks in both countries to exchange (wholesale CTCs) issued by those countries’ central banks. At the same time, the conversion of central bank securities denominated in different monetary units can be carried out in a new special segment of the foreign exchange market. In the future, the model with a universal digital currency, which assumes that several countries either at the level of national central banks or through the mediation of international financial institutions, agree to issue a universal digital currency (U-W-CBDC), which can be secured by a basket of national currencies of central banks, may cause some interest.

In principle, the concept of the CBDC returned central banks to the idea of James Tobin, expressed more three decades ago, regarding the fact that not only corporations but also private individuals should have the right to keep money in an account in the central bank [25]. Now, the decline in the use of cash in some countries required some response.

The creation of a CBDC would require a sound legal framework, in line with the transferability principle under EU law. One key consideration is whether retail CBDC can and should have the same legal tender status as banknotes and coins. In practice, legal tender status means that CBDC must be used anywhere and under any conditions, possibly even offline. Without legal tender status, it would be necessary to clarify the legal basis, as well as the relationship between CBDC and euro banknotes and coins, and the process by which one could be exchanged for the other. Shouldn’t it be recognized that the ECB’s exclusive right to authorize euro issuance will also apply to digital issuance? A retail CBDC could be based on digital tokens that would be distributed decentralized—that is, without a central ledger—and provide anonymity to a central bank, similar to cash. Some experts are sure that such digital currency could not be absolutely anonymous. If this turned out to be the case, it would inevitably raise social, political, and legal issues. We are currently reviewing the legal issues raised by the potential use of intermediaries to facilitate the circulation of CBDCs as well as the processing of transactions in CBDCs. To what extent are we allowed to delegate public legal tasks to private individuals? And what would be the appropriate amount of oversight of such entities? Alternatively, a retail CBDC could be based on deposit accounts with a central bank. Although this applies to a huge number of accounts, it will not be a particularly innovative option from a technological point of view. For the Eurozone, this would basically mean increasing the number of current deposit accounts on offer from around ten thousand to between 300 and 500 million. A CBDC of this nature would allow a central bank to record transfers between users, thereby providing protection against money laundering and other illegal uses (or those deemed illegal by the rulers of the time), depending on the degree of privacy afforded to users.

Such a caution, in the end, led to the fact that the leader in the race of central banks to create their own digital currency turned out to be the Bahamas. On these islands, in October 2020, the first “Sand Dollar” was put into circulation. At the first stage (in which 130 thousand “sand dollars” were released into circulation with a total volume of 308 million Bahamian dollars in circulation), only 6 small companies were connected to the new system, and the first transaction was an international (cross-border) payment. However, the central banks of other countries immediately paid attention to this breakthrough, seeing in it a possible threat not only to traditional commercial banks but also to the dominance of the dollar in the world financial arena [26].

6. Conclusion

To summarize our research results, one has to stress that we considered the phenomenon of Financial Globalization as the economic environment in which Monetary Innovation takes place. Next, we considered the development of securities into quasi-money (“strange money”) and the long transformation of the essence of money from the Gold Standard to modern virtual (electronic money), and finally, we presented the combination of market and state (fiat) money in the form CBDC.

As we have seen, the exchange of information (more broadly, access to information) plays an increasingly important role, and it is information that determines the effectiveness (value) of market operations. Digital money is not based on trade or credit. This is a new form of money, often called Information Money. We prefer to use a different name—Big Data Money— and will proceed from the fact that this form of money is adequate for the new form of economy—“Digital Economy.” Therefore, the conducted analysis allows us to assume that in the choice of essence, the confrontation will be between commodity, credit, and digital money.

It is likely that a new powerful innovative force—Artificial Intelligence—will soon break into the sphere of Monetary Relations. And this can fundamentally change not only the activities of central banks but also the very essence of money. It is quite possible that the CBDC without emerging (or without gaining key positions) will cede the leading role to a new form of money that we have not even imagined yet.

To use notice of John Maynard Keynes, we can say: “… there is no scientific basis on which to form any calculable probability whatever. We simply do not know” ([27], p. 214). But the decisive factor for us will be the victory of one of the probable types of globalization:

• Modern or classical/sovereign (when there will be a whole series of states approximately equal in terms of their political and economic importance),

• Late Modern—in the form of either hegemonic (when the world will be dominated by one superpower) or supersovereign (when the majority of states will cede their economic sovereignty to an international superpower) and, ultimately,

• Postmodern or alternative/network (when the main role will be played by non-state international actors).

Depending on this, corresponding types of Global Money may be formed.