Not heard about ‘Project Dunbar’? You’re not alone – the ‘project’, which is all about CBDCs (central bank digital currencies) was only announced by the Bank for International Settlements (BiS) on 2 September. CBDCs & cryto have become hot topics in the financial world.
Dunbar is the latest step on the path towards wider development of CBDCs. It’s perhaps another nail in cash’s coffin. The BiS says that Dunbar is an alliance of the “Reserve Bank of Australia, Bank Negara Malaysia, the Monetary Authority of Singapore, and the South African Reserve Bank with the Bank for International Settlements Innovation Hub to test the use of central bank digital currencies (CBDCs) for international settlements.”
In other words, the plan is to develop a way of linking together national CBDCs to make cross-border settlements – instantly and cheaply – in one digitised currency.
Dunbar is not alone. There is the catchily-named project mCBDC being collaboratively tested by the Hong Kong Monetary Authority, the Bank of Thailand, the central bank of the United Arab Emirates and the ‘Digital Currency Institute’ of the People’s Bank of China (PBoC). It’s odd that the PBoC is part of mCBDC. China is already busily deploying its own CBDC, the so-called ‘e-yuan’. China Construction Bank, a state-owned but publicly listed enterprise, has already opened more than eight million digital wallets for individuals and companies.
As of June this year, the China Construction Bank reported more than 28 million e-Yuan transactions with a total value of Yuan 18.9 billion (about $3 billion). Total e-Yuan transactions by all Chinese banks are now more than $5 billion. At Beijing’s winter Olympics in February 2022 foreign visitors will find themselves ‘encouraged’ to use the e-Yuan for all their spending. In order to do so they will have to provide the PBoC with their passport information.
Remember that in 2013 China’s President-for-life Xi Jinping said “whoever controls data has the upper hand.”
The US has its own CBDC project being tested by boffins at the Massachusetts Institute of Technology (MIT). The American CBDC in-waiting has already been dubbed the ‘Fedcoin’; the Fed is expected to issue a report this month on digital Dollars. The European Central Bank aims to introduce a CBDC by 2025.
CBDCs are not going away. But how fast will they be rolled out? Can they stop the onward march of private cryptocurrencies?
China’s CBDC – digital Leninism?
China clearly has ‘first-mover advantage’. But China’s e-Yuan, a CBDC, also undermines one of the main ambitions of private cryptocurrency proponents – the anonymity that comes from using them. The e-Yuan is designed so that all transactions using it are traceable in real time, “providing a state surveillance capability that does not exist with the current mixture of cash and digital payments operated by private platforms such as WeChat Pay and Alipay.” Some are calling it digital Leninism or techo-authoritarianism.
While there has been a rush to develop and promote private cryptocurrencies (currently there are around 6,000 different ones) the central banking world outside China is moving slowly but steadily. CBDCs carry a multiplicity of risks, both for governments and individuals. At the heart of these risks is one word – power. The power of the state, the power of the individual.
Power is control over money – who issues ‘legal tender’ can best stake a claim to be the legitimate government. A CBDC, no matter how it’s issued, will still depend on how much faith one has in a central bank. Whether it’s a fedcoin, an e-yuan, or an e-euro, a CBDC will only be a new form of the fiat Dollar, Yuan or Euro.
The Wild West of CBDC crypto
The rapid growth of crypto and fintech firms, have changed the way we make payments, deposits and loans – the whole infrastructure of commercial banking – into a plethora of unsupervised and barely regulated networks.
It’s a kind of Wild West right now, with central banks the isolated marshal (think Henry Fonda clutching a CBDC) desperately trying to chuck the drunks (armed with their cryptocurrencies) out of the saloon. The newcomers on the block are disrupting commercial banking’s previously stable deposit base, and cutting profits.
Commercial bank bosses are worried that the development of a retail CBDC (such as China’s e-Yuan) will disintermediate them – cut them out of the financial supply chain.
Collapse of faith in the banking system?
But conventional commercial banks have been their own worst enemy. Expensive, cumbersome and slow payment systems gave birth first to credit cards, then payment platforms, and now decentralised blockchain-based solutions. Cash has meanwhile steadily lost ground.
Without the near-meltdown of the global banking system in 2008, when banks benefited hugely from tax-payer funded bail-outs, confidence in the reliability of commercial banks might still be high. The surge of interest in cryptocurrencies outside the conventional banking system is partly down to consumers’ collapsed faith in commercial banks and fiat money. Lots of people say that buyers of cryptocurrencies are just trying to make a quick buck; but I suspect many are simply trying to protect what money they have.
Regulators continue to make speeches about how it’s “difficult for regulators around the world to stand by and watch people, sometimes very vulnerable people, putting their financial futures in jeopardy, based on disinformation and fear of missing out” (as Charles Randell, chairman of the UK’s Financial Conduct Authority, said this week). It may be a headache for regulators; for those of us wondering what money might be today and tomorrow, it’s a nightmare.
CBDC and crypto stability
As central bankers deliberate, some countries have already decided what form of alternative currency they are going for. We have seen China’s plans. Others are taking a private route.
El Salvador has become the first country to make Bitcoin legal tender. President Nayib Bukele says use of Bitcoin will be optional, although the law that opened the way for the Chivo says Bitcoins must be accepted if offered, and that salaries and pensions will continue to be paid in US Dollars, which replaced the Salvadoran Colon as legal tender in 2001.
Salvadorans are being offered $30 in Bitcoin slivers via a state-provided digital wallet called “Chivo” (slang for ‘cool’) but opinion polls suggest most Salvadorans are against the idea.
On the other hand, some crypto supporters point to the massive stimulus programme being implemented by the US and speculate this will inevitably lead to a debasement in the Dollar’s value. Given that some 20% of El Salvador’s gross domestic product (GDP) is accounted for by remittances in US Dollars sent home from abroad, having an alternative that might keep its value makes sense.
El Salvador’s gamble hit the buffers on its first day – the price of Bitcoin crashed from $52,000 to less than $43,000 at one point. The International Monetary Fund (IMF) doesn’t like countries using cryptocurrencies as legal tender. It says cryptocurrencies threaten “monetary stability”.
And the Salvadoran experiment will mean that the intergovernmental Financial Action Task Force (FATF) “will be all over El Salvadoran banks, businesses, and other financial institutions like a wet blanket.” That may be true; but cryptocurrencies like Bitcoin only make the game more complex for anti-corruption agencies such as FATF – they don’t change the game entirely. In emerging economies, where financial instability, high inflation and weak national currencies are a fact of life, cryptocurrencies have gained a firm foothold.
Money needs to be publicly acceptable
According to one commentator: “states exist to provide essential public goods. Money is a public good par excellence. That is why dispensing with the role of governments in money is a fantasy.”
But what if money is somehow taken out of the hands of governments, which is what private cryptocurrency users shout about? Or what if governments change what is considered money, without consulting the people who vote for them?
In China the latter question is not really a concern; the politburo decides and enforces that decision as law. The e-Yuan is clearly going to be a winner in China.
Western-style democracies give their citizens greater freedom of choice, and many millions have chosen cryptocurrencies over fiat money. That may be an unwise choice, not simply because the barriers to entry for creating cryptocurrencies is so low but also because they are so volatile; “the volatility of Bitcoin prices is extreme and almost 10 times higher than the volatility of major exchange rates (US dollar against the euro and the yen).”
This may upset El Salvador’s monetary experiment; if people there pay their taxes in Bitcoin while government spending remains primarily in US Dollars this would put heavy pressure on the exchange market and on the country’s international reserves, which in any case are tiny, just over $3 trillion.
Gold, crypto, value and exchange
As we have said in previous editions of Soapbox, since President Richard Nixon finally killed the gold standard 50 years ago money has been de-anchored from anything but our collective trust that governments and their tools, central banks, will behave responsibly. That trust was fatally injured during the 2008 financial crisis. Shortly after, technology facilitated the creation of cryptocurrencies – badly named because they aren’t currencies but a “very speculative asset” according to Steve Hanke, an economics professor at Johns Hopkins University.
Money on the other hand should be a store of value, a unit of account and a medium of exchange. A really sound currency is durable, portable, divisible, uniform, limited in supply and acceptable. Cryptocurrencies are neither a store of value (they can go up and down like a yo-yo) nor a good unit of account.
Glint is a part of the digital payment Revolution without being part of any blockchain. Yet it’s independent of nationally controlled fiat currencies. If ever a world of private money was to dawn, we believe that nothing else but gold would have the trust that is essential in any money that is universally accepted. At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
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