“I’m going to write an article on money and morality” I say to my spouse, “Those two don’t usually go together” she says. A fair point when you think about it.

Money and morality have had an intertwined relationship over the centuries, and money as a vehicle for exercising power remains as a core influence in terms of its impact on societal values. But the more recent developments in terms of new forms of digital money raise a whole set of new questions on this topic.

Where have we come from?

Of course, money has relied on a bedrock of trust; trust in the issuer, trust in the currency, trust of its role in society. However, money is also a channel for moral, or immoral, principles and behaviour. Around 600BC, Lycurgus of ancient Sparta allegedly had an aversion to wealth inequality and introduce the concept of “iron money”, large heavy iron spits that when red hot were drenched in vinegar so limiting the utility of the iron itself other than as a form of money. The weight of such iron money was so great that it took a “yoke of oxen” to move even a small sum from payer to payee. Cross-border currency controls were therefore not a big issue for ancient Sparta!

In this example, the form of money was used to influence moral behaviour directly. But was this a reflection of money’s ability to direct a certain moral approach, or was it just a means for Lycurgus to implement the behaviours he thought were appropriate for society at the time. In a more general sense, does money implicitly carry a moral payload of some sort, or its take on the morality of those that wield it?

Money in the digital economy

As we move from ancient history to more modern times, money Is taking on new digital forms, be it stablecoins, tokenised bank deposits or Central Bank Digital Currency. These new forms create new opportunities and risks in terms of their morality.

Stablecoins as a mirror on morality

Stablecoins, where fiat deposits are swapped for digital tokens pegged to fiat, are fast becoming a major component of our monetary landscape. However, they also bring new dimensions to question of morality and money. Typically issued by private entities, there are implicit questions of trust in the issuer (Who is in charge? Can I get my money back? What is their reputation? Etc) as well as the nature of the reserves held (What will they do with my money? Will my money be safe?) and of course trust in the underlying public blockchain technology. Stablecoins also face the question of what moral duty does the issuer have to guarantee the purported benefits of transparency and consumer protection.

Of course, the underlying blockchain technology has many benefits which can aid a moral society. Access can be gained through just a mobile phone rather than needing a state identity, an address, a bank account etc; inclusivity is also greatly enhanced. Similarly, the speed, borderless nature and low cost of payments helps wealth distribution directly, making remittance payments easier and cheaper and transforming money transfer agent rents to payer/payee value. For those living in countries with weak national currencies there are additional benefits in terms of pegging one’s financial assets to a stronger international currency. The decentralised nature of the underlying blockchain technology also has benefits in terms of no dependence on centralised entities (other than the stablecoin issuer as noted above), and stablecoins also bring, through their use of public blockchains, a high degree of privacy. 

Of course there are risks as well. If we hold our stablecoins in a self-custody wallet, losing the private key means losing all the corresponding financial assets (A fool and his stablecoin are easily parted..). There is no recourse to a bank or the state. And at the macro level, as the vast majority of stablecoins are US Dollar denominated, much has been said of their impact on “dollarisation” and dollar hegemony. This may have a consequent impact on nations with weaker currencies and their ability to run efficient and stable banking systems, as well as furthering the ability for strong currencies to be used as an economic weapon in terms of sanctions and access.

Tokenised deposits: Trust in the old guard?

In response to the evolving monetary landscape and the cost benefits and “always-on” nature of blockchain technology, banks have been developing tokenisation models for bank deposits, an early example of which is the JPM Coin. Typically constrained to private permissioned blockchains, their utility is constrained to individual bank networks unless an interbank settlement platform is developed, as in the Regulated Liability Network concept. In moral terms, this form of money maintains a more modern version of the traditional commercial banking status quo. We need to trust commercial banks as the centralised custodian of our monetary assets, a recognition that banks will have the ability to oversee our assets and payments but with the typical benefit of deposit protection.

Through the use of underlying blockchain technology, tokenised deposits can provide the much-vaunted “Platform for Innovation” for the monetary landscape, bringing new capabilities in terms of payment programmability and reduction in fraud that may enable a safer and more inclusive society.

But there remains the risk to some of the continued propagation of the traditional financial system, with its fractional reserve system and the inherent risk of bank runs versus the promised of fully backed reserves with stablecoins. Trust is required in the fractional reserve system as well as the bank itself.

Central Bank Digital Currency: Trust in the state?

With rather a chequered track record in adoption, CBDC’s represent the opposite end of the spectrum from stablecoins in some respects. Positioned as a digital form of physical cash, they lack the anonymity of cash with the consequent societal concerns on privacy and surveillance. This needs to be balanced with, as a liability on the central bank, CBDCs being the lowest risk monetary asset, if the central bank and the broader state has the trust of the individual.

Surveys by central banks and others demonstrate that privacy is one of the biggest public concerns around CBDC’s, and has led to major backlashes to the concept in the US for instance. Central banks may go to great lengths in terms of public statements and CBDC design to demonstrate that they have no access to personal information, however trust is hard to gain and easily lost, especially with conspiracy and disinformation risks propagated by social media.

Some jurisdictions that implement CBDC may wish to take advantage of the technology to ban payments for certain article (firearms, drugs, alcoholic drinks for underage children etc) or for more sinister surveillance purposes. Even when this may not be the case, the possibilities still may fuel to disinformation risks.  

CBDC’s do have the potential to help with inclusivity (by allowing limited access without the need for a bank account) and in financial innovation, though the experience of early adopters illustrate the challenge of mass adoption. In summary, central banks face the challenge of balancing econmic sovereignty with individual financial privacy and freedom.

Looking to the future

As our economy evolves to be more digital in nature, digital money will become even more prevalent in society. Cars, AI agents and robotic assistants may have the ability to make digital money payments on our behalf, raising further questions in the trust needed in the agents we use, as well as the form of digital money used. As technology develops, and new forms of digital money evolve, society faces new choices in terms of the trade-offs in the role morality has to play within our monetary universe. Privacy vs security, trust in the state or our banks or new private entities, financial inclusion or financial colonisation, the choice is ours. But as we consider the interplay between money and morality in more digital times, we should remember the warning from Ralph Waldo Emerson “A man is usually more careful of his money than he is of his principles."

Keith Bear is a Fellow at Cambridge University’s Centre for Alternative Finance, part of the Judge Business School, and a Fintech advisor/mentor. Previously he was the Global Leader for Financial Markets within IBM's Industry Platforms organisation.