Arguably every major economy does. Central bank digital currencies (CBDCs) mark a sizable shift in the global financial architecture and countries that opt-out risk not only the technical benefits of digital cash – but also their place in the future financial order.
State of play
The debate surrounding the digitisation of national currencies or the creation of CBDCs has so far focussed on the user-case for citizens and businesses. It starts with lower-cost and frictionless payments and ends with questions about the impact on existing commercial banks and user privacy. The potential for a CBDC to be traceable (i.e. not anonymous) and shift deposits away from the banking sector are key sticking points that continue to slow progress in western jurisdictions.
The international impact of digital currencies on the global monetary system has so far been overlooked. Jurisdictions will pursue differing CBDC strategies based on the specific external pressures that a changing monetary landscape poses for them. Motivations for a CBDC varies from preserving international monetary dominance to ensuring control over domestic economics.
The G2 and global monetary dominance
The US and China are assessing the benefits of introducing a CBDC – and the risks of not.
For China, the case is relatively clear: if its e-yuan project (successfully trialled at the Winter Olympics) takes off, it could allow China to reap some of the privileges that the dollar’s supremacy gives to the US. A CBDC could extend China’s role in global payments, using existing networks (e.g. Alipay, Tencent) to promote the e-yuan amongst trading partners and consumers abroad. Such shifts in payment patterns could ultimately decrease China’s reliance on SWIFT, allowing it to bypass western financial systems and repatriate valuable transaction data.
Unlike in the West, there are few downsides to CBDC issuance for China. Concerns around disintermediation of banks and the invasion of consumer privacy carry less weight given state control of the banking system and the long arm of state surveillance.
China outlawed private cryptocurrencies (that would sit outside state control) early on, but the US has acquiesced in the rise of dollar-denominated stablecoins as a boost to innovation in domestic payments and a potential channel through which to export a (private sector) digital dollar.
Signs that the US is seriously moving towards a Federal Reserve issued digital dollar are few. Tensions over an enlarged state infrastructure and the disintermediation of banks remain high – underlined by the introduction of a Bill in the House that would prevent the Fed from issuing retail accounts to citizens.
The pursuit of global relevance
There are diverging political views between the UK and EU on CBDCs. Seen as a tool to strengthen the Eurozone, the European Central Bank is currently in a two-year investigatory period exploring proposals for a CBDC. The opportunity for a CBDC to bypass US payment intermediaries such as Visa and Mastercard and facilitate new European digital providers is attractive. However, policy concerns over consumer privacy have emerged as the key challenge that the ECB has yet to answer.
In the UK, a Joint Taskforce between the Bank of England and HM Treasury continues its work. Despite the recent expert Lords committee’s scathing conclusion that a CBDC is a “solution in search of a problem”, the committee did recognise that a changing geopolitical landscape could enhance the case to proceed with one. With the Chancellor of the Exchequer understood to be increasingly drawn to the opportunities from cryptoassets following a visit to the West Coast, a ‘Britcoin’ could remain an option for the UK.
For economic control
Russia, like China, continues to exert control over citizens’ access to and use of cryptocurrencies, fuelled by concern of Russian wealth and influence draining away via unregulated digital currencies. As sanctions placed on Russia’s financial institutions threaten to cut-off Russian banks from the global financial system, Moscow may now accelerate its relatively advanced Digital Ruble project. Action by the West to lock Russia out of SWIFT, which would likely push it towards CIPS and the yuan, can only accelerate this trend. For now, control remains a top priority and CBDCs promise to be a useful vehicle for surveillance capitalism.
What does this mean for business?
The entry of nation states into digital finance means we are now accelerating towards systemwide change. Private sector businesses will soon be pincered by private initiatives like stablecoins and government responses led by CBDCs. We don’t yet know the final model for CBDC adoption, but its deployment is all but inevitable given the geopolitical trajectory.
Western governments do not yet have a vision of how they should integrate with the private sector, but they must. This means four things will happen:
- Existing financial institutions will need to play a role in CBDC intermediation.
- Stablecoins are unlikely to be banned but will face bank-like regulation since they are perceived to pose similar risks.
- International payments rails will increasingly be dominated by digital currency.
- Global monetary and financial stability policy will have to accommodate both public and private digital currency.
Incumbents and innovators alike need to stay close to both policy and market developments to future-proof their businesses against this systemic change.
Jonathan Sandler, Flint Consultant, with input from Flint Partner Alex White, Flint Director Simon Horner, Flint Manager Anna Trevers and Flint Consultant Dylan Saralis. To find out more about how Flint can help you navigate the risks and opportunities of these developments, please get in touch.