Governments go crypto!
Blockchain and Bitcoin have now been around for years and have lost their nefarious image over time. Nowadays, cryptocurrencies appear as legitimate instruments in the financial landscape. Consequently, governments are stepping in: many of them either have started or are building plans to issue digital currencies, one of the reason for these moves being the fear of seeing money privatized as is the case with bitcoin and as could happen on a much wider scale with Libra. The topic of Central Bank Digital Currencies (CBDC) is now totally mainstream! According to a research conducted early 2020 by the Bank of International Settlements, 80% of central banks are working on central bank digital currencies.
CBDCs have most of the characteristics of traditional currencies: they can be used for payment, for storing value or simply as a unit of account. Each unit of the digital currency is individually identifiable. Unlike Bitcoin, CBDCs are centrally controlled, thus they may or may not be implemented through a distributed ledger as a simple database could be more adapted. When issuing CBDCs, Central Banks want to guarantee their stability, as well as at least the same level of security as traditional currencies. The digital currencies should also be as flexible for use as traditional ones: they need to be easy to store, transfer or transmit by a variety of financial services independently of their support.
China first! The Middle Empire has launched its project for its sovereign digital currency, called Digital Currency Electronic Payment (DCEP), under a centralized system, not using blockchain technology. People’s Bank of China (PBOC), the Chinese central bank, has conducted tests in Suzhou, Xiongan, Shenzhen and Chengdu and is now starting to introduce its Digital Yuan, making it the first roll out of central bank digital currency (CBDC). Under this trial program, PBOC distributed “red envelopes” - a reference to China’s traditional way of gifting cash - in the form of online wallets containing 200 digital yuan (EUR 25.10) each to 50,000 randomly selected consumers in Shenzhen region.
The Reserve Bank of Australia, in a partnership with leading Australian financial institutions Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys Software, a blockchain technology company, announced it was “exploring the potential use and implications of a wholesale form of central bank digital currency (CBDC) using distributed ledger technology (DLT),” according to their media release early November.
The UK Treasury Department announced early November they will propose a regulatory approach for relevant stablecoin initiatives; “Stablecoins” being privately-issued digital currencies. While they do not disclose concrete projects, the UK Treasury said they are “considering whether and how central banks can issue their own digital currencies as a complement to cash.”
In the European Union, the ECB still seems to be divided whether to issue digital currencies or not. Early October, the ECB released a report on a “digital euro” in which the Central Bank concludes “most of the desirable features of a digital euro derived from our analysis are mutually compatible and can be combined to meet the requirements of the Eurosystem and of users” but that “the Eurosystem must address a number of important legal considerations related to a digital euro, including the legal basis for issuance, the legal implications of different design features and the applicability of EU legislation.” As a result, the ECB has launched a consultation and anticipates to make its position public by mid-2021.
The Bank of Japan announced it would begin experimenting in 2021 on how to operate its own digital currency.
Countries as diverse as Brazil, Cambodia, Canada, Iran, Madagascar, Norway, Sweden and Switzerland have made announcements saying they are considering issuing their digital currencies.
Central bank digital currencies are expected to be technology efficient as transfers can be made involving only one entity unlike our traditional three-corners or four-corners banking card payments. Being run by governments they could be a means of preventing illegal activities and guaranteeing the rightful payment of taxes. Getting away from metal and paper supports is anticipated to bring additional security. Finally, CBDCs can be seen as a means for a better banking regulation and effectiveness of monetary policies.
On the other hand, most liberal analysts, generally distrusting governments, oppose CBDCs as they consider them as a too deep intrusion in their lives and a threat to their privacy rights. Having all transactions logged in the central bank ledger is a risk governments would get too much data about their private life, leading inevitably to more taxation and more intrusion in their privacy. Even worse, they anticipate that as the system is totally government-run, a rogue government could instantly prevent some subpart of the population from accessing their own assets!
CBDCs can be seen as a new step in the evolution of payment means, making them fit with today technology. However, we all know payment means keep on adding to each other and never disappear: barter trade, gold, coins, banknotes and checks have not been displaced by electronic financial transactions. There is little risk they would all disappear with the inception of central bank digital currencies.
What does this mean for the secure transactions industry? From the very beginning of secure transactions, we all remember Visa campaign motto: “Cash is old! Cash is dirty! Cash is expensive!” One of the goals of the secure transactions industry has been to digitize all transactions and to displace cash. Digital currencies can be instrumental in reaching these goals. We are used to performing payments regardless of the support, processing yuans, rands, dinars or guaranis does not make any difference. So processing digital yuans, dollars or euros will be a simple increment in our processing systems.
However, as CBDCs are totally run in a single place, in the central bank books, they may have less need for the services delivered by the secure transactions industry. Undoubtedly, P2P (peer-to-peer) transactions can be run with a single operation in the central bank ledgers and payments to merchants could also be simplified. Nevertheless, in our liberal economies the right for citizens to choose their bank and the right for merchants to choose their acquirer has almost come on par with basic citizen rights. Preserving these rights mean that the efficiency of the CBDCs will have to be regulated and restricted to preserve individual freedoms and free competition. Can we expect central banks and governments to self-regulate?