The Race Is On To Become the World's Digital Reserve Currency. Who Will Win?
Keld van Schreven is the Managing Director and Co-Founder of KR1 plc, the London listed cryptocurrency and blockchain investment company.
Central Banks are excited by Bitcoin's dramatic innovation, its blockchain technology and the potential for Central Bank Digital Currencies (CBDC). However, they are also cautious as Bitcoin has a reputation as the badlands of financial services, used by drug dealers and money launderers, not upright citizens and certainly not central bankers.
So after the Bitcoin innovation what have been the catalysts for Central Banks to act? One word. Libra. Facebook’s Libra caused Central Banks to panic around the world by announcing it would launch its own digital currency. Libra could become the global default crypto with two billion people having instant access to it just by having a Facebook account. Governments around the world threw their arms up in horror. France and India immediately banned it. Libra doubled governments’ efforts to respond to protect their interests. China reacted to the Libra launch quickly.
“Libra has introduced a concept that will impact the traditional cross-border business and payment system,” said former People’s Bank of China (PBoC) Governor Zhou Xiaochuan.
China saw Libra as an American Imperial economic invasion and responded by fast-tracking its own digital currency known as digital currency electronic payment (DCEP) system. In the early days of digital currencies, the PBoC did not outlaw assets such as Bitcoin, but rampant speculation and wild price swings led China to implement a blanket ban on trading and new initial offerings of digital currencies. PBoC created a dedicated institute to explore a CBDC. China is well suited to a CBDC as most payments are now digital through apps operated by Alipay or Tencent.
The prize to get a functioning CBDC in a nation's economy is huge. The Bank of England’s own research suggests a 3% bump to GDP if you run a Central Bank Digital Currency (CBDC), roughly the same boost to the economy as a big tax cut. The Bank of England’s recent whitepaper states there are plenty of benefits of CBDCs around interest rates, stimulus, and accountability. This is highly compelling.
Just like the Portuguese Escudo, Dutch Gulder, English Pound and U.S. dollar became global reserve currencies in their time, in paper terms, it’s now the turn of a digital currency to take the crown. This is the reason CBDCs are a hot topic. Whoever wins, wins big therefore justifying their Central Bank’s move to launch these currencies. While the Facebook founder Mark Zuckerberg was up in front of Congress explaining himself and being blocked, the Chinese were quietly rifling through the whitepaper and making plans. This tension between America and China has resulted in a classic superpower slugging match with CBDCs.
Where is the rest of the world? In fact, some of the world’s major central banks are already teaming up to assess potentially developing their own digital currencies. A group has been formed in order to “share experience as they assess the potential cases for central bank digital currency in their home jurisdiction'”. The body will be made up of the Bank of England, the Bank of Canada, the Bank of Japan, the European Central Bank (ECB), the Riksbank, and the Swiss National Bank, along with the Bank for International Settlements. Noticeably absent from the group is the People’s Bank of China and yes you guessed it … America. The body forming is a great move. The reality is the group will move even slower than PBoC and Libra and these Central Banks may get left behind, and lose first-mover advantage.
The U.S.’s Federal Reserve has so far largely distanced itself from the concept of a CBDC. In December, Treasury Secretary Steven Munchin said he and Fed Chairman Jerome Powell see ‘no need’ for the U.S. to create a digital currency in the near future. Yet Powell has said the Fed is monitoring the activities of other central banks to identify potential benefits. There is further skepticism from Canada and the Netherlands “The essence of the [distributed ledger technology] infrastructure is that no single party should be trusted enough, but don’t we just trust a central bank to maintain the integrity of the global ledger?” said Harro Boven, policy advisor in the payments policy department of the Dutch central bank. Satoshi Nakamoto, the legendary mysterious inventor of Bitcoin would say not.
In England, the debate around CBDCs intensified last year when the outgoing Bank of England Governor Mark Carney laid out a radical proposal for an overhaul of the global financial system that would eventually replace the dollar as a reserve with a Libra like CBDC currency. Carney felt fully justified to explore the possibilities. In Europe, the ECB policymakers have already discussed the idea of issuing their own CBDC. Christine Lagarde, the ECB’s head, has long argued that central banks should consider the merits, which she believes include public goals such as financial inclusion, consumer protection, and payment privacy. In Sweden, they are moving quickly to adopt a CBDC Sveriges Riksbank, the central bank of Sweden, which recently announced a pilot for a digital krona, or e-krona and the main reason is “to be ready for a cashless future”.
But where does this leave Bitcoin and other non-CBDC cryptocurrencies in relation to several functioning CBDCs? Firstly, it’s a great endorsement for all of crypto, rubber stamping their benefits, although the paradox is that this endorses decentralization and control away from Central banks. Secondly, fully functioning CBDCs are a tide that will lift all crypto boats, many skeptics will get off the fence and invest time and money into crypto. CBDCs will create a new boom for Decentralised Finance (DeFi) services as these new CBDCs are digital and will interoperate with DeFi services, greatly increasing volumes. Bitcoin and other major cryptocurrencies are decentralized and not owned by a central organization and therefore inherently more trustworthy. Bitcoin was a response to the 2008 banking crisis and no casino bankers operate in Bitcoin.
But the ultimate question is - who would you trust, incorruptible decentralized currencies like Bitcoin, or centrally controlled and potentially co-opted Central Bank Digital Currencies?