Cryptocurrencies are all the rage, even though the concept still feels more like a lottery or a game of chance, as opposed to real money, Fernando Fernández writes in an essay on finews.first.


This article is published on finews.first, a forum for authors specialized in economic and financial topics.


The digital revolution is underway and is already changing how we pay, save, and invest. The banking business is no longer what it used to be, with its profitability under threat from historically low-interest rates, increasingly intrusive regulation and, above all, new digital competitors who are threatening to take its business away.

The digital transformation of money gives the private sector the ability to create money, enables central banks to bypass commercial banks to distribute money and guarantee its value, and empowers citizens to have their savings deposits on their cell phones, thereby removing the need for middlemen.

«Money is one of the great inventions of mankind»

We economists are harbingers of doom and gloom, so it will come as no surprise if I take a step back from this collective infatuation. What exactly is money today: a piece of paper, a bookkeeping note, a bank account, a credit card? Money is all that and much more: it is trust.

In the words of Niall Ferguson, money is one of the great inventions of mankind, comparable only to fire, the wheel, penicillin, and the contraceptive pill. However, money has to fulfill three basic purposes: it has to be a means of payment, a unit of account and a store of value. In other words, it serves

  • to buy goods and services because everyone accepts it,
  • to count and compare values and wealth because its price is rather stable over time, and
  • to transfer value in time and space, to leave to our children or use it to pay for retirement.

There was a time when there were many different kinds of money and many issuers of this special asset. But the evolution of history took over, with the most advanced, i.e. the most economically and socially successful societies, agreeing that it was advisable to grant the exclusive power to create money to a special institution that they called a «central bank,» endowing it with certain properties, and technical and economic independence. In exchange, they also imposed certain obligations on these banks, such as maintaining the value of money and the stability of the financial system. Digital money threatens this monopoly.

«This independence is also its weakness»

There are many different cryptocurrencies that have come into being over the last ten years. Today, however, two have become particularly popular: Bitcoin and Diem (known as Libra until only recently.)

Bitcoin has been so successful that every self-respecting investment bank has made room for it in their product portfolio and specific marketplaces have been created to trade in it. Bitcoin has made huge fortunes for some, appreciating dramatically, though I fear it will also bring great ruin, which is normal for a purely speculative asset. Its appeal lies in its absolute independence and decentralization, the famous «miners» who, regardless of their voracious need for energy, create bitcoins according to a fixed rule.

Yet this independence is also its weakness: who guarantees its value in case of distrust, in case of runs on money? Since its price suffers tremendous fluctuations for any conservative saver or investor, it is not money, nor can it be. It is something else, an asset akin to gold, useful to deposit the immense liquidity created by central banks with their unlimited expansionary policies, a store of value for wealth of dubious origin, or a means of payment for illegal transactions.

Libra was successful in that it opened a new era, that of CBDCs. It has awakened central and commercial banks to the actuality of the end of their monopoly and should thus step up their game. It has signaled that the wholesale and international payments system is very expensive and inefficient and that commercial banks must either spearhead digital transformation or lose their foothold. It may already be too late. Libra forced central banks to join the digital race, to establish their own digital dollar, euro or renminbi, and to do so quickly. Because being the first promises to pay back.

«The Federal Reserve expressed an open attitude towards the digital dollar»

It is no longer just Jamaica, Uruguay, and Sweden that have introduced or are about to introduce a digital currency as legal tender, just recently El Salvador bitcoin; all the central banks in the most sophisticated financial jurisdictions are doing so. The European Central Bank has published a white paper on the digital euro and is poised to adopt an explicit policy this summer.

The Federal Reserve expressed an open attitude towards the digital dollar in May this year. There are many unresolved issues on the subject, but the important ones are not technological. Instead, it is social and economic issues such as privacy, access, complementarity with cash, and the sustainability of commercial banking that will be critical to the speed of adaptation and the success of the radical transformation of our financial system.

To illustrate the magnitude of the challenge, I shall conclude with three «small» problems that must be solved: monetary sovereignty, financial stability, and the fate of private commercial banks. An international freely accessible digital dollar would end monetary policy independence for many countries. What reason would there be to continue to operate with a volatile, useless currency to use for payment on Amazon?

«And how would credit work if the central bank holds all the liabilities in the system?»

If we had a digital currency, how could we prevent bank runs and external crises from being immediate and recurrent, at the click of a button, simply because of the slightest rumor of weakness? If private individuals have access to a digital wallet or a current account at a central bank, what reason is there to keep their savings in a commercial bank? And without deposit funding, what chance do retail banks have of surviving?

And how would credit work if the central bank holds all the liabilities in the system? Would we go back to direct lending? These questions require a very careful, highly detailed analysis. Because there is a lot at stake for society in getting it right with the digital transformation of this marvelous social invention known as money.

  • This article was originally published in Spanish in America Economia.

Fernando Fernández joined IE Business School as a Professor of Economics in September 2009. He started as a scholar fully dedicated to teaching and research; afterward he worked in international economic policy at the IMF, in the banking arena at Santander Group, in international consulting and as Rector of private universities. He conceives Economics as a science in the service of freedom and human progress. As a science, Economics requires empirical contrast, analytical rigor and clarity of exposition. As a welfare engine, it requires the participation of economists in public debates, in shaping public opinion.


Previous contributions: Rudi Bogni, Peter Kurer, Rolf Banz, Dieter Ruloff, Werner Vogt, Walter Wittmann, Alfred Mettler, Robert Holzach, Craig Murray, David Zollinger, Arthur Bolliger, Beat Kappeler, Chris Rowe, Stefan Gerlach, Marc Lussy, Nuno Fernandes, Richard Egger, Maurice Pedergnana, Marco Bargel, Steve Hanke, Urs Schoettli, Ursula Finsterwald, Stefan Kreuzkamp, Oliver Bussmann, Michael Benz, Albert Steck, Martin Dahinden, Thomas Fedier, Alfred MettlerBrigitte Strebel, Mirjam Staub-Bisang, Nicolas Roth, Thorsten Polleit, Kim Iskyan, Stephen Dover, Denise Kenyon-Rouvinez, Christian Dreyer, Kinan Khadam-Al-Jame, Robert HemmiAnton AffentrangerYves Mirabaud, Katharina Bart, Frédéric Papp, Hans-Martin Kraus, Gerard Guerdat, Mario Bassi, Stephen Thariyan, Dan Steinbock, Rino BoriniBert Flossbach, Michael Hasenstab, Guido Schilling, Werner E. RutschDorte Bech Vizard, Adriano B. Lucatelli, Katharina Bart, Maya Bhandari, Jean Tirole, Hans Jakob RothMarco Martinelli, Thomas SutterTom KingWerner Peyer, Thomas Kupfer, Peter KurerArturo BrisFrederic PappJames Syme, Dennis Larsen, Bernd Kramer, Ralph Ebert, Armin JansNicolas Roth, Hans Ulrich Jost, Patrick Hunger, Fabrizio QuirighettiClaire Shaw, Peter FanconiAlex Wolf, Dan Steinbock, Patrick Scheurle, Sandro Occhilupo, Will Ballard, Nicholas Yeo, Claude-Alain Margelisch, Jean-François Hirschel, Jens Pongratz, Samuel Gerber, Philipp Weckherlin, Anne Richards, Antoni Trenchev, Benoit Barbereau, Pascal R. Bersier, Shaul Lifshitz, Klaus Breiner, Ana Botín, Martin Gilbert, Jesper Koll, Ingo Rauser, Carlo Capaul, Claude Baumann, Markus Winkler, Konrad Hummler, Thomas Steinemann, Christina Boeck, Guillaume Compeyron, Miro Zivkovic, Alexander F. Wagner, Eric Heymann, Christoph Sax, Felix Brem, Jochen Moebert, Jacques-Aurélien Marcireau, Ursula Finsterwald, Claudia Kraaz, Michel Longhini, Stefan Blum, Zsolt Kohalmi, Karin M. Klossek, Nicolas Ramelet, Søren Bjønness, Lamara von Albertini, Andreas Britt, Gilles Prince, Darren Willams, Salman Ahmed, Stephane Monier, and Peter van der Welle, Ken Orchard, Christian Gast, Jeffrey Bohn, Juergen Braunstein, Jeff Voegeli, Fiona Frick, Stefan Schneider, Matthias Hunn, Andreas Vetsch, Fabiana Fedeli, Marionna WegensteinKim Fournais, Carole Millet, Ralph Ebert, Swetha Ramachandran, Brigitte Kaps, Thomas Stucki, Neil Shearing, Claude Baumann, Tom Naratil, Oliver Berger, Robert Sharps, Tobias Mueller, Florian Wicki, Jean Keller, Niels Lan Doky, Karin M. Klossek, Ralph Ebert, Johnny El Hachem, Judith Basad, Katharina Bart, Thorsten Polleit, Bernardo Brunschwiler, Peter Schmid, Karam Hinduja, Zsolt Kohalmi, Raphaël Surber, Santosh Brivio, Gérard Piasko, Mark Urquhart, Olivier Kessler, Bruno Capone, Peter Hody, Lars Jaeger, Andrew Isbester, Florin Baeriswyl, and Michael Bornhaeusser, Agnieszka Walorska, Thomas Mueller, Ebrahim Attarzadeh, Marcel HostettlerHui Zhang, Michael Bornhaeusser, Reto Jauch, Angela Agostini, Guy de Blonay, Tatjana Greil Castro, Jean-Baptiste Berthon, Marc Saint John Webb, Dietrich Goenemeyer, Mobeen Tahir, Didier Saint-Georges, Serge Tabachnik, Rolando Grandi, Vega Ibanez, Beat Wittmann, Carina Schaurte, and David Folkerts-Landau, Andreas Ita, Teodoro Cocca, Michael Welti, Mihkel Vitsur, Fabrizio Pagani, Roman Balzan, Todd Saligman, Christian Kaelin, and Stuart Dunbar