Digital money - the final frontier : The End of Nation State

How Digital money and emergence of corporates owning retail to digital money, will disrupt Central Banks and in turn The Nation State

“It’s less harmful to piss off the government than piss off Google,” Mr Abuhazim said. “The government will hit me with a fine. But if Google suspends my listings, I’m out of a job. Google could make me homeless.” Mr Abuhazim " "Millions of Business Listings on Google Maps Are Fake—and Google Profits" WallStreet Journal (link)

Welcome to the dawn of digital. The end of the nation-state and the beginning of the corporate state. Interestingly while every transition between powers, sees the vigorous attempt by the incumbent player to fight upcoming player, the dawn of digital has not seen any. Rather, it is the nation-state that has been pushing for the adoption of digital technologies and giving more powers to mega corporates and in turn making the state irrelevant.

However, of all the digital things being pushed, the push for digital cash seems most bizarre. Many governments across the world have been pushing for a cashless society. Sweden has been one of the earlier proponents of going cashless and the use of cash has dropped by a whopping 50% in the last decade or so. Emerging economies are pushing for digital payments with India being at the forefront of it as its widely believed that going cashless will stop tax theft, curb crimes and improve overall economics as costs of digital is far lower than that of physical cash. However, proponents of privacy as well as citizens in oppressive regimes, have equally strong arguments in favour of cash. 

While one can argue for and against cash in terms of taxation/theft/privacy etc, the bigger or most important question which is missing in all these debates is about the power of nation-state vs power of private enterprises. Is the nation-state willingly /unwillingly ceding power to private enterprise by giving control of money? And if a state loses the power of money, will it be able to exist? 

To understand this game of money, we will have to understand the game of money or rather the creation of money itself!

The central bank creates money in two ways. One by printing notes and the other by allowing banks to lend. Every time banks print notes or bank lend money to people, they create money. Interestingly issuing discount coupons/vouchers is akin to printing money only. 

Likewise, it controls the supply of money/inflation by these two measures which are by reducing the printing of notes and curbing banks power of lending through CRR/Repo rate management etc. Further movement of money heats up or slow down the economy, which is called the velocity of money. Inflation in an economy depends upon the velocity and growth of the money. Hence any time economy is slowing down or heating up, central banks the world over try to control the velocity and growth of the money by either pumping money or draining money from the system. This arrangement has run fine so far without any hiccups and so far the control of money has remained in the hands of central banks/state. 

Once the central bank withdraws money from the system, its effect is felt by all stakeholders equally.

This system also works as none of the players in the economic system be it banks, credit card companies, shops, businesses and end customers/consumers have no major influence on the system.  Hence State bank of India despite having 23% of the overall market share, can not control money velocity due to the intertwining of many operators in the play where money changes many hands between goods suppliers, service providers and money operators.  Even within the money domain, there are multiple players like credit card companies master/visa, payment gateway companies. pos players, various banks, loan providers, NBFCs etc. Hence the overall economic system functions smoothly due to the presence of many players within the financial system and the separation of goods/service providers from the financial world. This financial market gets further fragmentation as each manufacturer or service provider is aligned with different financial partners for their various needs. This fragmented and diversified system ensures that no single player as an outsized influence or superior control on the market. Money keeps on moving seamlessly between various players and central banks are able to act and control issues related to economic shocks, inflation, economy heating up or slowing down through control on the money supply. 

However, all this changes drastically in the digital world. In the new digital world order, every entity is trying to create its own ecosystem where it wishes to manage all spectrum of commerce just not the money. The ambition of new digital entities is not limited to being just an e-commerce company or a generic search company but they aim to own and operate a whole ecosystem. Amazon is not satisfied with just being a retailer to the world, it is also pushing for amazon pay its own digital currency. Google is not happy being the search engine of the world, it is also building google money. While Amazon and Google of the world are getting into the financial domain, Alibaba group already runs everything. Alibaba which started as a b2b (business to business) website, now runs the largest e-commerce company and also the largest financial company in China. 

In long term, the consequences of these developments will be life-changing. With complete power, the platforms with control on the complete ecosystem will morph into walled gardens. These platforms will control the life of private individuals much more than the nation-state. Further, while an ordinary citizen has recourse to the high handedness of state through the judiciary, election and multiple laws which govern the conduct of the state, the ordinary citizen has no such recourse against these digital mega-corporations as 100s of resellers/publishers on digital platforms discover every day. A single email suspending their activity without any recourse or explanation arrives and wipe out their economic or digital existence. This action covered by their own copious so-called yada-yada terms and conditions, can turn their life upside down, make them homeless and leave without an identity.  "It’s less harmful to piss off the government than piss off Google,” as one Mr Abuhazim told to The WallStreet Journal. “The government will hit me with a fine. But if Google suspends my listings, I’m out of a job. Google could make me homeless.” 

However, it is just not the power of citizens in the digital world, it is the power of the state itself that is coming under threat. In a real digital world, very important organs of the state like the central bank will become irrelevant in the long run.  

Just look at the e-commerce ecosystem evolving around and it is not hard to see that in the next 3 to 5 years, one of the company will have an ecosystem where it will operate bank, wallet, POS, clearinghouse, e-commerce websites. In a way, this platform will have omnipresence in the market where all transactions between consumers/merchants/traders/manufactures will happen within its system without going out. The money will just rotate inside its ecosystem and will build a different velocity. For example,  a consumer starts her interaction with the ecosystem by paying for the goods she purchased from the e-commerce company. She gets discount vouchers in the form of ecosystem money. The e-commerce company pays merchandiser through the ecosystem payment system.  The merchandiser usees the same wallet money to pay for groceries. The grocery seller uses the same wallet money to pay for clothing and the dressmaker pays her tax advisor using the same wallet. The tax advisor was the initial consumer who transferred the money to the system in the first place. This scenario will make monetary policy ineffective in the long run as it will not be able to impact money velocity inside the ecosystem. If a rupee that enters the system is transacted within the system for 6 times, the impact of monetary policy on money velocity will be just 16.7% (1/6). 

But wait the disruption will just not stop there!. As this private entity can issue discount coupons/run scheme, it can practically print money (a legal tender which is being used for consumption). Today the impact of coupons/discount schemes is insignificant as the amounts are very tiny compared to the whole economy but if one entity starts owning say 25% of the overall economy, a 10% push can make inflation points go up or down, depending upon the index. Further by playing with friction, the corporate can easily shape savings/consumption and investments and not only it can change the behaviour of ordinary citizens, but it can also destroy or make the life of an average vendor by playing with their ranking in their ecosystem. For example, if Amazon controls 15% of retail sales, its issue of coupon and placing of a particular vendor product can impact the financials of that particular vendor in a significant way.

This scenario has the potential to make Central banks irrelevant. With an irrelevant central bank, how a nation-state will be able to provide welfare as well as effectively implement its policies like inflation management? History has enough examples of the fate which awaits governing class when ruling governments fail to manage inflation or control the value of their money. Any wild fluctuation in the value of money always leads to chaos, riots and change of regime. So if the nation-state loses control of the money, Will this be the beginning of the end?

The way leaders at nation-state. egged by their policy think tanks are pushing for adoption of digital, it seems that days of Nation-state are numbered against the onslaught of faceless, hydra shape corporation. Though one might think of all these as just a triad of an overactive mind, the digital playbook did play out in 2020. 

5th November 2020 was supposed to be the landmark day in the history of the financial market as the world was waiting for Ant Financial IPO to debut on the Shanghai Stock Exchange and HongKong Stock Exchange. With an offering of $37 billion, it was billed as the monster  IPO the world has ever seen so far. However it was not the sheer size, but the crazy demand that was making waves.  The issue was oversubscribed by some 870 times and bids of $3 trillion (In 2019, India's GDP was 2.59 trillion USD) were received by retail investors alone. 

However, in a bizarre or rather shocking turn of event, regulators suspended the listing on 3rd Nov 2020, just two days before the big bang.  The move created shock waves across the world and put OpEds on fire. The majority of experts linked the suspension of IPO to the reaction of Jack Ma, Alibaba founder. Jack Ma had criticised Chinese regulators in an open forum a few months before the IPO.  Some experts also blamed the fragile ego of Chinese premier Xi Jinping who was allegedly not pleased by Jack Ma and his criticism of Chinese regulators and banks. 

Was this a clash of egos and show of the Chinese communist regime with little tolerance of opposing views or Chinese regulators figured out something more drastic?

Ant Financials is a Chinese behemoth even by Chinese standards where everything is far bigger than anywhere in the world. Ant Financial manage over $560 billion without having a bank license and its transaction arm Alipay has a market share of 54% of Chinese third party payments which did a volume of $33 trillion in 2109. With asset management, insurance, loans, and digital transactions, Ant is almost everywhere in the life of an ordinary citizen and the story does not end here. Alibaba the sister or rather patent company is the largest e-tailer in China. The size of Alibaba can be seen from the fact that in the 2020 Singes days shopping event (11th Nov 2020, Alibaba sold goods/merchandise worth $74.1 billion on a single day. 

The successful IPO would have set Alibaba/ Ant on the path of total control on creation/circulation and use of money and would have made the nation-state in a weaker position, but for the suspension order issued by stock exchanges on 3rd Nov.

However while a communist regime edged away the challenge posed by a corporate state, the democratic western world is busy staring at Bitcoin and wondering its next move. 

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