Standing from a promontory on the eastern side of the Hellespont, the strait separating Europe from Asia, Xerxes must have been met with an impressive sight. Standing before him, as the historian Herodotus tells us, lay the grandest army ever assembled: one and a half million men, a force ten times that of Eisenhower’s at D-Day.
At this point in Xerxes’s rule, the Persian empire already stretched from Himalayan foothills to Egyptian pyramids—further east into Asia than the Romans would ever go and further west into Africa than the Greeks ever had. Nevertheless, Xerxes dreamed of more, crossing the straits to advance into the final frontier: Europe.
Despite warnings from his uncle Artabanus, who advised his nephew that Persia’s armies were not yet equipped to cross the small island harbors of the Aegean Sea, Xerxes was not one to be dissuaded. Standing at the edge of the Hellespont, he grew tired of waiting for strategic capabilities to match his ambition. As such, at the dawn of 480 BCE, confident in the power of a “brave heart” in surmounting any obstacle, he ordered his army to cross.
Things would not prove to be so easy. Plagued by insufficient supply lines and poor logistical infrastructure, Persia’s forces fell to several decisive defeats. A year later, Xerxes would cross the Hellespont again, except this time it would be in defeat.
Today, the age of empires is over. Every parcel of land on earth has been mapped and surveyed. Instead, in the vast realms of our digital world, we face a different kind of frontier—one which promises to fundamentally reshape our most basic institutions. The $84 trillion dollar world economy is one such place.
Traditionally, economic change emerges from some central power—a central bank, or perhaps a large corporation. Within the last decade, however, new technology has emerged that has shifted the center of gravity in the financial world. Chief among them is blockchain, technology that utilizes a decentralized ledger of transactions to bypass traditional intermediaries and bolster anonymity. Notable examples include Bitcoin, Ethereum, and DogeCoin (which, despite being created as a joke, actually has the 7th highest market capitalization of all cryptocurrencies).
While they may appear fringe, cryptocurrencies are rapidly moving into the mainstream. Within the past decade, the total market capitalization of bitcoin and other cryptocurrencies has skyrocketed from $100 billion in late 2018 to nearly $1.6 trillion today. Surveys by the World Economic Forum suggest that 10 percent of global Gross Domestic Product will be stored in blockchain by 2027.
This enormous wave of digitization will not merely include funnily-named coins; countries and central banks are also coming onboard. Last June, El Salvador became the first country to recognize bitcoin as legal tender; according to the Atlantic Council, 30 countries (including China) are developing or piloting Central Bank Digital Currencies (CBDC’s), their own digital cash.
It is here, as the giants of traditional financial empires prepare to enter the digital realm, that we lay on a bold new monetary frontier. We stand at our very own Hellespont.
To understand this distinctly 21st century challenge, however, it may just prove useful to rewind history by 2500 years. Looking out from this promontory, where both worlds, old and new, are visible, a series of challenges with nationalizing cryptocurrencies emerge. Some are practical, as existing cryptocurrencies still face massive volatility and usability issues with severe macroeconomic repercussions; others are more philosophical, as CBDC’s drastically concentrate monetary flow, the antithesis of blockchain’s decentralization ethos.
Whichever way we consider the issue, however, one thing becomes clear. With trillions of dollars at stake, now is not the right time to cross this Hellespont. We should heed Xerxes’s experience. We should wait.
To see why, we first have to understand how countries will digitize. Most seeking to do so have two options: 1) recognizing cryptocurrencies as legal tender; or 2) creating CBDC’s. We can begin by first looking at a country that has already crossed one leg of the strait: El Salvador. On June 7th, its President Nayeb Bukele signed a law deeming bitcoin as “unrestricted legal tender.”
Supporters of the move applauded it as a step into the future, one with a critical practical benefit: cryptocurrencies allow for seamless exchange of money, even for those who don’t have a bank account or remain outside traditional financial institutions. For a country where under 40% of the population own a bank account, bitcoin opens up new financial levers to those traditionally underserved. Recognizing bitcoin also has a tremendous secondary effect. El Salvador derives 23% of its GDP from remittances, and crypto wallets can bypass the typical $25 international wire fee for monetary transfers.
Within these advantages, however, also lies a much larger problem.
Broadly speaking, money can be used in three ways: a unit of account (valuing items), a medium of exchange (widely-accepted payment), and a store of value (an asset). Traditional currency checks each of these boxes, as it is utilized to price goods, buy goods, and store wealth.
Bitcoin, however, is different. Remittances, salary, or otherwise, most peer-to-peer usage of bitcoin uses it as a vehicle—traditional money converted into bitcoin, sent, and converted back to a usable currency. In just the past year, its price has fluctuated between $10000 and $60000 per coin; a recent slide in July of 2021 erased $90 billion from the entire cryptocurrency market (that’s two times what Lehman Brothers was worth before its downfall). Because of its exceptional volatility, it is usually used as a short-term store of value—or, in other cases, as a speculative investment.
Ultimately, as the IMF observed in a recent analysis, “the most direct cost of widespread… bitcoin adoption is macroeconomic stability.” Households and businesses would have to spend tremendous amounts of human capital choosing how to spend/price with a highly unstable currency. Given its wild price fluctuations, the currency can’t become a unit of account or a medium of exchange. It’d be like traversing the Hellespont in a typhoon.
The alternative method of digitization, of course, is to use a currency that is already widely-circulated, relatively stable, and commonly-used: a CBDC. While CBDC’s don’t have the same practical limitations as other cryptocurrencies, they face their own set of philosophical quandaries. One of the key tenets behind blockchain-based cryptocurrencies is decentralization. Using a global ledger, monetary transactions no longer require governments and banks; instead, each person has their own block and ledger. In this world, crossing the Hellespont is not envisioned as an invasion, directed by central actors like Xerxes and the Federal Reserve, so much as a series of homesteads settled by individuals.
Far from removing governments and banks, however, CBDC’s place them on the strait’s promontory—at the center of control. In a few button presses, central banks could change the supply and demand of their digital currency however they desire. On the one hand, this would allow central banks to develop better measures of real-time economic performance (compared to traditional indicators, which usually have a months long lag behind monetary policies). On the other hand, it would completely undermine the anonymity built into standard cryptocurrencies. Instead, depending on how they are configured, CBDC’s may allow banks to monitor every economic transaction.
Alongside privacy, security is also a concern. CBDC’s would generate a wealth of highly-sensitive consumer spending data, and no unifying standard currently exists across proposed monetary infrastructures. “Central banks,” noted Justine Humenansky, who sits on the Policy and Governance working group at the United Nations’ Digital Currency Global Initiative, “are not used to designing consumer-facing products.”
“Setting clear standards regarding security and privacy,” she continued, “will be critical to ensuring CBDCs improve financial inclusion rather than exacerbate the limitations of current monetary systems.”
At this point, a common question arises: “If not now, when is the right time for countries to deploy cryptocurrency?”
Philosophically speaking, there is no clear threshold. As soon as functional CBDC’s are fully deployed, it may be difficult to obtain transparent safeguards that ensure data privacy. Practically speaking, however, the answer is more simple: we should treat cryptocurrency like everyday tender when they begin behaving like it, fulfilling all three roles of money. For existing coins, there may be a long road ahead; for CBDC’s, it may be launch day. While further issues cloud cryptocurrencies’ road to full adoption, such as their worrying use for money laundering/fraud and the ecological impact of mining, ensuring they function as regular money is a good start.
Ultimately, the correct time to take the plunge may never be clear. However, we can take a lesson on timing. Straddling the edge of Europe, Xerxes ultimately made his “brave heart” decision simply because he was tired of waiting; his grand army lay before him and he sought to deploy it. The fate of a million and a half men would follow.
Seated at the edge of our Hellespont, with masses of our technology on one side but an incomplete infrastructure to use it on the other, we ought not make the same mistake.
