CBDCs, the revenge of governments?
After China has taken many monetary authorities aback with its Digital Yuan, CBDCs – Central Bank Crypto Currencies – seem to be the latest fashion! Many central banks or governments are now announcing their cryptocurrency projects.
This move can be seen as the latest evolution of the influence battle between multinational companies and governments. Especially, the ongoing evolution of the US administration seems to be getting back to more government power and less laissez-faire attitude towards large corporations. We can analyze all the recent announcements about government cyber currency launches as a will to become less dependent from traditional payment schemes, namely Visa and MasterCard.
Many governments recently made announcements about government managed crypto currencies, or at least about government managed digital currencies:
The Central Bank of Sweden (Riksbank) just announced the launch of the e-krona once the regulation framework is adapted. Further to pilots taking place as early as 2017, the e-krona has been developed with Accenture, and is working on the Corda blockchain platform of the R3 company. It will allow to create uniquely identifiable currency units; however, tests are still ongoing regarding the scalability of the system for retail payments.
The Bank of Japan (BoJ) has started trials of a new digital currency, a digital yen. The Central Bank will at first explore the basic functions of a payment instrument such as issuance, distribution and redemption. Reducing the amount of cash used in day to day transactions in Japan is among the objectives listed by the BoJ.
India has taken a different approach: the first step, which is under discussion in the Parliament, would be to introduce a law to ban private cryptocurrencies such as bitcoin, and then to set up a framework for an official digital currency to be issued by the Reserve Bank of India (RBI).
For the Eurozone, the European Central Bank (ECB) has run a public consultation on a digital euro, demonstrating that what the public and professionals want the most from such a digital currency is privacy (43%), followed by security (18%), the ability to pay across the euro area (11%), no additional costs (9%) and offline usability (8%). So far, the ECB published a document saying no decision is made yet, but by mid-2021, the Eurosystem will decide whether to pursue a formal CBDC project. However, the fact that the draft regulation called MiCA (Markets in Crypto-Assets) has already been published shows European authorities take the matter seriously.
Also, on the other side of the pond, there seems to be no emergency considerations: the US Federal Reserve Chairman Jerome Powell recently declared: “Because we’re the world’s principal reserve currency, we don't need to rush this project, and we don't need to be first to market,” according to PaymentsDive. However, at the same time, the Federal Reserve Bank of Boston is partnering with researchers at the Massachusetts Institute of Technology (MIT) in an effort to build and test a "hypothetical" central bank digital currency (CBDC). A “Digital Dollar Project” has already been setup as a partnership between Accenture and the Digital Dollar Foundation to explore the matter.
Government-issued digital currencies are already in the plans of numerous governments which have to a certain extent communicated about them: France, Jamaica, Korea, Morocco, New Zealand, Pakistan, Thailand and Turkey are among the most talkative on the topic.
While these projects can be seen as a return of governmental control on the currency, they also consider the CBDC should be used in retail transactions both domestically and internationally. Then, the next step will be to work on international principles and procedures to be able to perform international transactions using these new financial instruments.
This is where our usual suspects make a comeback! Visa announced they have already settled a transaction using USD Coin (USDC), a stablecoin backed by the US dollar, on Ethereum blockchain. They add they are ready to launch the USDC settlement capability “in the year ahead.” Of course, at the same time, Mastercard announces they launched a Central Bank Digital Currencies (CBDCs) Testing Platform to allow Central Banks to evaluate use cases and test roll-out strategies for CBDCs. PayPal goes even further and already proposes a cryptocurrency wallet to enable its 26 million worldwide merchants to accept digital assets as payment from PayPal’s 346 million users. In addition, no one has forgotten that Facebook, along with a large number of partners, started to promote its Libra concept a few months ago, an announcement seen as a threat by many governments.
So what will be the impact of CBDCs? At first sight they may look like an attempt for governments to fight the dominant position of major payment players, but when reality hits, many of the CBDC projects may have to rely on these classical payment experts to run their operations, at least internationally.