Pavel Bains is the CEO and co-founder of Bluzelle, a company providing a suite of blockchain-powered applications aimed to accelerate financial inclusion.
In this opinion piece, Bains argues that national currencies do not work in the interests of all a country's urban areas, predicting that soon a city will make the leap to its own, digital, currency.
Over the last 100 years, we have seen all innovation happen in cities. Cities are where people meet and exchange ideas, and opportunities in business emerge.
By 2050, it’s estimated almost 70% of the world population will be living in cities, more than double in 100 years. In absolute numbers, that is a growth of 850 million to 6.3 billion urbanites. In 15 years we will have 41 'megacities' (cities with populations of more than 10 million), a fourfold increase since 1990.
With all the power of growth and influence emanating from cities and not from farms and villages, our model of 'one country, one currency' is outdated.
I predict that within 10 years we will see the first city separate from the national currency and have its own, digital money.
Old terms no longer apply
We refer to countries as 'developed', 'emerging', 'developing', and 'poor' nations. This is wrong.
We would do better to refer to places as 'dynamic' or 'passive' regions. There are plenty of regions in the 'developed' world that now look like they are a 'poor' nation.
An example would be Detroit throughout the 2000s. Elsewhere, London is thriving and growing while cities in the rest of the UK are falling behind. And in Italy, for decades, Milan has been growing, but its surrounding region is doing quite the opposite.
Benefits of a local currency
The one-country, one-currency system is a relatively new concept. Formed only 300 years ago by English and French banking centralization. Until the turn of the 20th century, the US itself had different banknotes that were sold at premium or discount dependant on the reputation of the bank within a region.
Today’s split over the benefit of the euro as a single currency is the same conflict the US had over 100 years ago when it took a central route.
It makes sense now, though, that each city should follow its own business needs. Forcing two or more cities to share a currency sends false signals, as it strengthens one but weakens the other.
The concept of going to a city-based currency was brought up by Canadian economist Jane Jacobs in the 1970s. According to Jacobs, when a country covers a vast region, you get bad signals – the rise of one super city, which the national currency most benefits, and many passive cities that fail to develop.
The argument goes like this:
- With falling exports, a city needs a declining currency working like an automatic tariff and automatic export subsidy
- Once exports are doing well, it needs a rising currency to earn the maximum variety and quantity of imports it can purchase
- Exports may change because the city needs to start producing new products to replace earlier imports.
City currencies serve as a good feedback system because they trigger the right response. Look at city states like Singapore and Hong Kong. Both can plan policies efficiently in response to how their currencies are performing.
Back to Detroit: its economy was almost solely dependent on the automotive industry. As it failed to compete with other markets and exports dropped, it never received the early signal to make changes.
The US dollar was strong, resulting in Detroiters continually purchasing imported goods that Walmart brought in from China. City officials, paid in dollars, never felt the need to make overt changes until it was too late.
If Detroit had had its own currency, city officials would have be paid in that and, as the currency declined, imported goods would have seemed increasingly expensive. Politicians would therefore have received a signal that they needed to move away from auto manufacturing and develop new strengths.
The role technology will play
Blockchain and digital currencies make now the right time for a city to adopt its own currency. This is where bitcoin got it both right and wrong. The 'wrong' is its followers' aim for it to be a new global currency.
But bitcoin’s methodologies can be implemented. For a new currency to be adopted quickly it needs the following characteristics:
- Cheap: fiat currency in note and coin form is expensive to produce, manage and distribute. A digital currency removes all those costs and can easily be distributed.
- Secure: given that it is digital, cryptographic and based on pure mathematics, the chance of forgery or distrust is eliminated
- Safe: a digital currency can be backed by external assets like gold, treasury bills, foreign exchange or equities, just like current money assets are
- Usable: as places like Stockholm are going purely digital, a digital city currency could be massively adopted.
Which city will be first?
I predict the Scottish city of Glasgow will become the first major city to issue its own currency. It’s one of the cities that has failed to benefit from the British pound, while London has done so greatly. Glasgow came close to a recession in 2015, it has lower labour growth when compared to its southern counterparts, and unemployment has reached its widest gap compared to England in 12 years.
Further, Brexit poses a real threat to Scotland’s future growth with the potential for a loss of trade, inward investment and finance worsening an already weak growth in productivity. Demand for Scotland’s products was already declining and Brexit makes the situation worse. In 2015 there was an 11% drop in exports compared to 2.7% for the UK as a whole. And guess what? Imports are rising.
But the city has the right foundation to adopt its own 'Glasgow Pound':
- It has the regional size and population where it can make a difference versus smaller cities like Dundee
- It has a strong record of academia, government and business working together. In recent years, all three came together to secure a £1.13bn city deal. This is the kind of unity that will be needed to push a city currency
- It has a thriving financial base, moving to 74th in the world for financial centers. This isn’t a great number, but it demonstrates it has a base and an educated population to make the new system work.
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