US banknote fading into binary and a bitcoin logo.
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The American Bankers Association (ABA) has reported to US Lawmakers that introducing a Central Bank Digital Currency (CBDC) could “fundamentally change the role of the central bank in the United States and reshape the banking system”, and I don’t disagree. It could, but to some extent that’s the point.

The ABA I think rightly advises the government that should lawmakers decide to move ahead with development of a CBDC, they should do so with caution and carefully consider the risks and benefits of various CBDC designs. In any change with such potential far-reaching economic impacts caution is most definitely warranted, the consequences of getting it wrong could be felt for decades. That being said, inaction is not the answer and is likely to be the worst choice here, yet inaction is what is being advised:

“CBDC should only be pursued as a final option to meet clearly-defined public policy goals that cannot be achieved through payments innovations that leverage existing digital dollars. As of today, those use cases have not emerged”

American Bankers Association:

To my mind there is absolutely no doubt whatsoever that Digital Currency is coming, and I doubt that’s even a controversial statement these days. We live in a world where thanks to the Coinbase Card I’ve bought myself a Gregg’s vegan sausage roll with BitCoin, so it’s funny to see entrenched industry bodies still clinging to this idea that Digital Currency is something central banks can sit around and wait for. Even the Bank of England acknowledges that much of what’s going on right now isn’t especially radical…

“stablecoins are not launching us off into some brave new world … just because something is packaged in shiny technology we don’t somehow treat the risks it poses differently”

Christina Segal-Knowles, Executive Director for Financial Markets Infrastructure (FMI) at the Bank of England

The reluctance from the banking sector puts me in mind of the early days of internet as print media resisted the transition to web content followed by the music and movie industries making the exact same mistake with the rise of peer-to-peer file sharing. History tells us that organisations entrenched in old industries tend to cling to old models because the idea of change is uncomfortable. History also tells us that this doesn’t usually work out well for those who get left behind.

So, what exactly is coming?

Well, that’s the $64tn question. It feels pretty certain to me that there’s a place for both open cryptocurrencies and Central Bank Digital Currencies but exactly how that will play out isn’t yet clear. In the cryptocurrency space it could be one or several of the existing well-known solutions such as Bitcoin, Ethereum, Litecoin (and maybe even Dogecoin). There’s also a place for the more utilitarian blockchain based solutions such as Ripple & Stellar, they’re less likely become mainstream payment vehicles but will likely play a part in the broader ecosystem.

It’s equally likely that new players in this space will rise up either organically or by being bootstrapped by existing players from the big tech sphere such Apple, Google, Microsoft, etc. There are definitely challenges ahead here though, with Facebook’s troubled Diem (formerly Libra) digital currency is still yet to get off of the ground, now switching its HQ from Switzerland to the US due to regulatory challenges. The reality here is that the fast-moving agile tech companies struggle to understand heavily regulated slower pace of the payments industry, it might be that existing payment industry titans like Visa, Mastercard, Square, Stripe or PayPal would make a better home for a fledgling digital currency since they better understand the landscape it would need to operate in.

In the CBDC world however there has been a significant uptick in activity lately with China not only conducting a successful trial of a Digital Yuan but also linking the Digital Yuan to Hong Kong’s domestic currency. The PwC CBDC global index reports that over 60 central banks have been exploring CBDCs with many having already completed or committed to conducting CBDC trials, aside from the People’s Bank of China these include:

  • Bank of Korea
  • Banque de France
  • Swiss National Bank
  • Sveriges Riksbank
  • Central Bank of Russian Federation
  • Bank of Japan
  • South African Reserve Bank
  • Bank of Thailand
  • Bank Indonesia
  • Eastern Caribbean Central Bank
  • National Bank of Kazakhstan

The fact is that #DigitalCurrency is coming and both open #cryptocurrencies and national/regional #CBDCs will play a part in that. I agree that on something with such potential broad impact caution is warranted, but if the US takes the ABA’s advice here and treats #CBDCs as a final option they’ll be way behind the curve. Instead, the Fed should be ramping up the research it has already begun and start running like trials to lay the foundations.

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