The authority over the value, supply, and circulation of money holds significant sway in shaping economic systems and the path of nations. Central banks and governments play a pivotal role in managing currency, enabling them to shape economic policies, control interest rates, and ensure macroeconomic stability. This control directly influences trade, investments, and overall national prosperity. However, the emergence of private digital currencies poses a potential challenge to this control, introducing new dynamics and possibilities that could disrupt the established order.
Preserving sovereignty
As public institutions, central banks hold the crucial mandate of implementing monetary policy, managing currency, and overseeing money supply. They achieve this by setting interest rates to maintain price stability and foster economic growth. Central banks regulate the circulation of money, issuing coins and notes while ensuring stable exchange rates. It is within their purview to maintain official reserves and safeguard the stability of the financial system.
Digital currencies, like Bitcoin, challenge the control of central banks over monetary policy and currency. Governments and central banks remain wary of their potential to circumvent capital controls, facilitate criminal behaviour, and disrupt the traditional financial system by eliminating intermediaries.
Bitcoin's decentralised nature undermines the necessity of central banks as it allows anyone to produce currency and enables direct peer-to-peer transfers. This systemic shift may render the role of governments in managing economic policies through intermediaries obsolete, affecting sovereign control over money supply, interest rates, and macroeconomic stability. Concerns also arise regarding the evasion of financial regulations, including Anti Money Laundering (AML) and Know Your Customer (KYC) requirements.
Governments and central banks remain wary of their potential to circumvent capital controls, facilitate criminal behaviour, and disrupt the traditional financial system by eliminating intermediaries.
Governments are closely observing the increasing popularity of digital currencies, driven by concerns about maintaining financial stability and safeguarding consumer interests. The emergence of private digital currencies poses a challenge to central banks and governments, as it becomes possible for citizens to opt for alternative currencies beyond their control, undermining the extent of control that central banks and governments can exert on the financial system. Moreover, the role and relevance of central banks and governments in shaping monetary policy may be questioned if they lose the ability to exercise control over the currency preferences of their citizens.
Myanmar’s digital dynamics of power
In Myanmar, the National Union Government (NUG) is taking advantage of cryptocurrency to circumvent the military-controlled economy and raise funds for the resistance in the absence of the ability to levy taxes. The NUG
emerged in 2021 following the coup, which resulted in the overthrow of the democratically-elected civilian government. Subsequently, the military junta
declared the NUG a terrorist organisation, making it difficult for NUG to collect donations to
pay for soldiers, equipment, and provisions for the numerous armed anti-junta groups in Myanmar.
The NUG issued the
Digital Myanmar Kyat (DMMK) to evade military oversight. Linked to the Myanmar kyat, the DMMK allows the NUG to determine its exchange rate independently, resulting in disparities between the market exchange rate and the official exchange rate established by the military government. Using an accompanying app called NUGpay,
volunteer agents can sign up users that are favourable to the resistance and raise donations without military interference. The implementation of the DMMK has also made it easier for NUG to reach a wider audience. NUGpay facilitates cross-border payments without transaction fees, allowing activists in countries like the
United States to collect donations from diaspora communities and transmit them back to Myanmar.
The National Union Government (NUG) is taking advantage of cryptocurrency to circumvent the military-controlled economy and raise funds for the resistance in the absence of the ability to levy taxes.
Although the DMMK focuses on donations, it has shown promise as an independent currency in some parts of the country. According to NUG officials, some
restaurants in areas under its control have begun to accept the DMMK as legal tender. The distinction between the military-issued kyat and the DMMK is not just a choice between two forms of payment; it signifies which rule the people of Myanmar believe is legitimate. Based on the split financial system in Myanmar and its consequences for sovereign legitimacy, it is clear why global governments are wary of digital currencies. When governments allow fiat currency to lose ground to digital currencies, they could also give away their ability to create monetary policy and effectively administer their country’s affairs.
China’s cautious monetary security approach
Though the digital yuan is gaining significant traction in Asia, China maintains contrasting views on cryptocurrencies and central bank digital currencies (CBDCs). While cryptocurrencies are not recognised as legal tender and are subject to strict restrictions, China actively promotes digital yuan as part of its strategy to internationalise the currency and reduce reliance on US-controlled financial networks.
In 2013, China introduced
measures to protect the status of the Renminbi (RMB) as the official currency, prohibiting financial institutions from engaging in Bitcoin-related activities to prevent money laundering risks and maintain financial stability. Subsequently, in September 2021, China further intensified its stance by
declaring all cryptocurrency transactions illegal and blocking access to foreign platforms.
China introduced measures to protect the status of the Renminbi (RMB) as the official currency, prohibiting financial institutions from engaging in Bitcoin-related activities to prevent money laundering risks and maintain financial stability.
China acknowledges the rising global influence of cryptocurrencies and sees digital money as a potential catalyst for global monetary decentralisation and the reshaping of the financial ecosystem. Chinese
leaders, along with the
European Union, regarded Facebook's Diem digital currency (now
discarded) as a significant risk, capable of undermining their authority over monetary policy and impeding their pursuit of greater monetary independence. While opinions differ on China's CBDC as a tool to enhance global power, the comprehensive ban on cryptocurrencies demonstrates China's commitment to safeguarding its monetary sovereignty.
India’s apprehensions
The Reserve Bank of India (RBI) has underscored the need for decisive actions to address the escalating risks associated with the crypto-assets ecosystem. The primary concern is managing the risks associated with stablecoins, which aim to maintain a steady value relative to fiat currencies but bear resemblances to money market funds. These stablecoins are susceptible to potential risks of redemptions and investor panics, necessitating careful mitigation measures. The RBI has further
cautioned against private currencies, emphasising their historical propensity to generate instability and their potential to undermine sovereign control over money supply, interest rates, and macroeconomic stability, especially in developing economies. The introduction of India's own CBDC, the
Digital Rupee, could be perceived as a strategic response to counter the challenges presented by the crypto-assets ecosystem.
The primary concern is managing the risks associated with stablecoins, which aim to maintain a steady value relative to fiat currencies but bear resemblances to money market funds.
RBI Governor Shaktikanta Das issued a warning, referring to cryptocurrencies as a significant
threat due to their speculative nature and lack of underlying value. In the Financial Stability
Report, Das emphasised the need to remain cautious about emerging risks and the potential disruption of financial stability caused by technology, despite its positive impact on the financial sector.
Digital grey areas on the global currency chessboard
Currency assumes a paramount role in monetary policy for central banks. Technological progress has paved the way for digital currencies, revolutionising the scale and potential mechanisms of monetary control. However, a consensus on how to navigate the development of private digital currencies remains elusive. Varied approaches can be observed across nations—while China has adopted a stringent prohibition on all crypto-related activities, countries like India have maintained a somewhat ambiguous regulatory stance by implementing fiscal barriers. At the core of these deliberations lies the concept of monetary sovereignty, exemplified by the military-issued Kyat and the DMMK in Myanmar, underscoring the interplay between currency control and the legitimisation of power.
The coexistence of governments with digital currencies ultimately depends on the choices made by individuals and governing bodies, with trust playing a pivotal role in shaping these dynamics. The allure of cryptocurrencies lies in their decentralised nature, removing the need for a central authority and placing trust in the system rather than the government. Central banks and governments strive to maintain authority over their currencies, ensuring their control over monetary policy remains intact. This inherent dichotomy seems destined to persist, with trust ultimately governing the dynamics of these new digital landscapes.
Sauradeep Bag is Associate Fellow at the Observer Research Foundation
Jenna Stephenson is an intern with the Geoeconomics Programme at the Observer Research Foundation
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
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