The National Bank of Kazakhstan is getting ahead of the game. In a joint seminar a few days ago with the Caucasus, Central Asia, and Mongolia Regional Development Center of the International Monetary Fund, the central bank announced plans to launch the digital tenge over three years. Ideally, it would eventually account for 10% of gross domestic product, the value of what the economy produces each year, but in reality would hit just 5% or 6%, according to the Bank’s simulations. No matter. It’s still a revolution. But every revolution has its skeptics.
Cash attracts us for its anonymity. I can buy Lady Chatterley’s Lover with physical tenge without anyone being the wiser. For that matter, I can buy a handgun with too few questions asked. Digital tenge, on the other hand, can
be tracked. How can we make digital tenge as anonymous as the real McCoy?
Another practical question: Commercial banks worry that as the depositor expects
inflation to weaken the tenge, he will sell it for digital tenge, leaving the
banks with fewer tenge to lend out at interest. One solution, as the National
Bank sees it, is to prevent the digital tenge from substituting for the real
one in loans. You could use the digital tenge only to buy and sell things; you
could not hold it as an asset. Exactly
how would the Bank keep anyone from holding the digital tenge for a long time?
The Bank says that it verified the likely success of the digital tenge as strictly a buy-and-sell instrument. In its survey of 3,000 respondents in Kazakhstan, 60% said they were willing to try the digital tenge. No surprise, considering that card payments in Kazakhstan increased tenfold from 2017 to 2020, according to the Bank’s white paper. And the Bank declared victory in a five-day experiment of the tenge in sales and purchases conducted with Eurasian Bank.
But there may be several problems with this experiment. First, given its history with the National Bank, Eurasian Bank is hardly a random choice. The Bank canceled the license of a Eurasian unit in 2016 and may wish to give it a second chance. That would be admirable, but it would not be objective statistics. (One notes with interest that Eurasian Bank will have a significant advantage over other banks in digital experience.) The Bank should have chosen its partner with a roll of the dice. More important, five days is not enough time to determine whether people will try to hold the digital tenge as an asset rather than the physical one.
Even more serious problems may loom. To keep the
digital tenge from supplanting the real one, the Bank proposes to hold constant
the supply of all tenge, physical and digital. But inflation is usually
accompanied by an increase in the supply of the inflated money—in this case,
the physical tenge. For example, during inflations, people saving tenge will spend them now while
they’re still worth something, increasing the total circulation of tenge. Since the total
supply of tenge is held constant, the number of digital tenge must diminish.
But this will make it more scarce, and hence more valuable, relative to the
physical tenge, than before. People will try to sell physical tenge for digital
ones, weakening the purchasing power of the physical tenge. Prices will rise, and the vicious cycle may
recur indefinitely, until the physical tenge is driven out of existence.
Running like rabbits
The Bank insists that its digital tenge would not cut
the ground under the commercial banks. The
Bank’s new instruments would appear in the market only, and they would be
available to all banks. But that’s not the question. Of course the Bank would
be impartial. But the fact that it is introducing
a digital tenge signals to the public that the new currency will have
advantages, at least in some situations. It is not a perfect substitute for the
physical tenge. Commercial banks that fail to recognize the digital tenge’s occasional
superiority could get blown away. Rather than soothe the timid, the Bank should
ready them for the future.
The digital tenge is the future -- it's so easy
and quick to use. The Bank proposes to protect the physical tenge by prohibiting interest to be paid on the digital one. However, the rate
of return on holding the physical tenge is negative -- minus the rate of
inflation, since it loses value at this rate. If the Bank plans to hold the
return to the digital tenge to zero, by adjusting its supply, people will
still prefer it to the physical tenge. Zero is better than minus 20.7%.
We could be in for a wild ride. –Leon
Taylor, Baltimore, tayloralmaty@gmail.com
I thank Forest Weld for catching a typo.
National Bank of Kazakhstan. (2021). Digital tenge project: White paper on project results.
Report
on the Results of the Digital Tenge Pilot Project White Paper.pdf
S&P Global Market Intelligence. (2016). Kazakh regulator terminates license of Eurasian Bank's unit | S&P Global Market Intelligence (spglobal.com)
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