Summary

Digital currencies, blockchain, and Web3: What do they mean? 

Digital currencies are virtual currencies that use cryptography for security. They operate independently of a central bank or government and are typically decentralized, relying on a unique technology called ‘Blockchain’ that ensures transparency, immutability, and security of transactions. Believed to be born out of the US financial crisis of 2008 by an anonymous individual or group of individuals using the pseudonym Satoshi Nakamoto, the identity of Satoshi Nakamoto still remains a mystery today. Nakamoto introduced Bitcoin in a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” published on October 31, 2008.  Publishing the introduction of digital currencies on Halloween sends an interesting message: Will this new technology of digital currency and Blockchain be a trick or treat? The Bitcoin network itself was launched in January 2009 when Nakamoto mined the first block of the blockchain, known as the “genesis block.” 

PricewaterhouseCoopers (PwC) defines the Blockchain as a “decentralized ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without a need for a central clearing authority”1.  See Graphic 1 below for an infographic of how blockchain works: 

Key words in the definition of blockchain are ‘peer-to-peer’ and ‘without a need for a central clearing authority’ as those two traits, we believe are the thread of the remainder of answering the questions in this discussion post.  But first, an internet history lesson that will lead us to ‘Web3’: What is it, what does it mean to digital currencies, the blockchain, the status quo of the centralized banking system and most importantly, the consumer. 

Web3 is the conceptual “advancement” of the fundamental way the internet works. By utilizing blockchain technology, the idea is to de-centralize the power and control consolidated by today’s tech giants. Web3 promises to correct the problems and perverse, misaligned incentives of Web2 and is a conceptual “advancement” of the fundamental way the internet works. By utilizing blockchain technology, the idea is to de-centralize the power and control consolidated by today’s tech giants.  Users will have a real vote on decisions made by the networks they spend time on where they are not the product, but the owner.  Where Web1 was a read internet and Web2 is a read/write internet, Web3 is a read/write/own internet.  Web3 will deconstruct the existing centralized power bases of currency and commerce and effectively transfer power from the classes to the masses.  The implications of this power transfer are endless. 

What does the future of the international monetary system / global payment system look like with respect to digital currencies?   

The international monetary and global payment system’s future with respect to digital currencies depends on Web3 implementation and adoption.  Without Web3, digital currencies within the current global monetary system will be another form of fiat currency with Central Bank Digital Currencies (CBDCs) being introduced to complement or replace physical cash. The CBDCs will offer improved monetary features of efficiency with speeding up processing times and a new feature of financial inclusion, but without Web3, CBDCs will continue business as usual with their bastion of control with digital currencies similar to current monetary policy and global payments. If Web3 is widely adopted and reaches its full potential, it implies a potential paradigm shift in the underlying way that modern monetary policy and global payment function. For example, private digital currencies can offer competitive alternatives to traditional banking and global payment systems, driving innovation and efficiency.  

The future of the international monetary system and global payment system with digital currencies is characterized by increased efficiency, inclusivity, and innovation. Central Bank Digital Currencies, stablecoins, and decentralized finance will play pivotal roles in this transformation. However, achieving these benefits will require addressing significant regulatory, interoperability, and security challenges. International collaboration and the development of robust regulatory frameworks will be essential to harness the full potential of digital currencies while ensuring financial stability and security. 

Given that Web3’s premise is ownership for the participant, there will be a transfer of power from the classes to the masses, which will include the very way in which value is transacted—moving from a locust of control within governing bodies of separate countries to a global algorithm that controls the creation and accounting of monetary units.  This is almost unfathomable within our current international monetary system and global payment structure, and one must ask this question: Will a computer algorithm and e-ledger be the whole solution that levels the playing field and fixes the inequities Web2 created?  Like cloning and AI, just because we can do it, careful consideration needs to be given to should we do it, and if the answer is yes, what are the implications for all stakeholders, not just the current guard of control?  Although it would be nice for all voices to be heard and for those of us ‘common’ people to have a seat at a table for once. 

If crypto currencies are, indeed, the future of money, what are the implications to the way monetary and fiscal policies are centrally managed? 

With crypto currencies alone becoming the future of money there would little change to the way monetary policy is handled today. Digital currencies would replace the assets backed currencies we have. 

If Web3 is implemented, then a single crypto currency becomes more practical with every new country’s support. As infrastructure ramps up to support Web3 transactions globally more economies can play on the same plane. Central management would be akin to the policies that the EU follows with the Euro, but in this case, these would be established and enforced by DAOs (de-centralized autonomous organizations). Cryptocurrencies lack these traditional tools but introduce new mechanics like staking, burning, and algorithmic adjustments based on predetermined rules, which can influence their supply and value. Combining the technical infrastructure utilized with cryptocurrencies with the social aspects of DAOs could effectively lead to an oxy-moronic “de-centralized central organization” responsible for the stewardship of this currency.  We assume that undergirded by Web3, ownership will flesh out the details and make sure that one group or individual cannot keep control. 

Is the decentralized world of bitcoin the solution?    

Just as with the implied shifts in global monetary policy, the de-centralized world of cryptocurrencies is unlikely to be game-changing on its own. Cryptocurrencies without an interlocking framework that fully utilizes their potential are likely to continue to be a financial curiosity for those willing to stomach their current volatility in value. Cryptocurrencies have become ingrained in the fringes of the modern zeitgeist. The allure of crypto’s de-centralization has driven a level of fervor and interest not always found with modern currencies. Despite the unique nature of cryptocurrencies, they too are still beholden to the Impossible Trinity. Cryptocurrencies enjoy a blend of Exchange Rate Stability and Full Financial Integration. Without a fundamental shift in how currencies establish their usefulness as liquid media with which to transfer value, they are likely to continue to face volatility when measured against existing sovereign fiat currencies. Cryptocurrencies deployed with the underlying framework of Web3, however, could change the world.  

Will central bank digital currencies (CBDC’s) become commonplace? 

Under the existing global monetary system, we see CBDCs becoming the mainstream answer to modern international monetary transactions. Assuming the continuation of the current system, CBDCs appear to be a strong answer to the challenges of our modern 

With the rise of digital currencies outside of Web3, countries could simplify the control they wield over the value of their currencies. Given the increasingly digital nature of modern commerce, it makes sense that CBDCs are being seriously considered by various countries. Deploying CBDCs would make the financial transaction mechanisms deployed by countries easier and faster. Despite this, CBDCs do not mean the Impossible Trinity is finally broken. As they are still sovereign currencies, the fundamental rules that govern the Impossible Trinity still hold. 

If Web3 and a singular digital currency become widely adopted it is likely that there will be significantly less demand for CBDCs due to their centralized-nature. 

Conclusion 

Any country could start their own digital currency to gain an edge over another country. We have too many distinct cultures and governments to support a homogenized system like bitcoin under the current global monetary paradigm. This is where Web3 holds the potential to radically change many of the underlying preconceived notions we all take for granted in today’s economy. Even though we don’t know exactly what the future of Web3 looks like, one thing is certain: the process of how we get there will likely still have its roots in Adam Smith’s adulation of the free market. As mentioned in the HBR article, “What is Web3?”, while scale was the metric of success in Web2, engagement will be the measure of success in Web3.  Digital currency and Web3 together have the power to de-centralize international monetary policy, dismantle the ‘impossible trinity’ for each country, and create a new global payment system where everyone has the opportunity to engage and be an owner. 

References 

1. PwC, Making Sense of Bitcoin, Cryptocurrency and Blockchain https://www.pwc.com/us/en/industries/financial-services/fintech/bitcoin-blockchain-cryptocurrency.html. 
2. Welcome to Web3, Harvard Business Review, Thomas Stackpole, May 10, 2022. 
3. Graphic 1 & 2: PwC, Making Sense of Bitcoin, Cryptocurrency and Blockchain https://www.pwc.com/us/en/industries/financial-services/fintech/bitcoin-blockchain-cryptocurrency.html. 
4. Van Eck Associates Corporation. (n.d.). Bitcoin Volatility. VanEck. Retrieved [insert the date you accessed the information], from https://www.vaneck.com/us/en/blogs/digital-assets/bitcoin-volatility/ 
5. Trust Machines. (n.d.). Bitcoin Scalability. Retrieved [insert the date you accessed the information], from https://trustmachines.co/learn/bitcoin-scalability/ 
6. Crypto.com. (n.d.). Bitcoin Energy Consumption. Retrieved [insert the date you accessed the information], from https://crypto.com/bitcoin/bitcoin-energy-consumption 
7. CGAP. (n.d.). Crypto Consumer Protection: Why Wait and See Is No Longer an Option. Retrieved [insert the date you accessed the information], from https://www.cgap.org/blog/crypto-consumer-protection-why-wait-and-see-is-no-longer-option 
8. Harvard Business Review. (2022, May). What is Web3? Retrieved [insert the date you accessed the information], from https://hbr.org/2022/05/what-is-web3