Ron Delnevo asks if central bank digital currencies are less about fending off competition from cryptos and more about advancing a political – and cashless – agenda
It’s hard to believe that it was only in 2009 that the first cryptocurrency – Bitcoin – emerged from the ether, with Satoshi Nakamoto moved to announce the existence of the Genesis Block. Handily, the year before, the very same Satoshi Nakamoto had developed a blockchain to serve as the public distributed and decentralised ledger for Bitcoin cryptocurrency transactions. Very logical.
First, invent the rails, then find something to run on them. And run Bitcoin, along with many other cryptos, it certainly did, to the extent that in early January 2023, Forbes magazine reported that the total market capitalisation of the top 10 cryptocurrencies amounted to a very cool £560billion. Cool that is, until we recall that the market cap of Bitcoin alone was north of £900billion only 15 months earlier. The extreme volatility of cryptocurrency values has rightly frightened many investors.
But central banks have been frightened of crypto for very much longer. Indeed, why would any organisation jealous of its centralised powers welcome crypto passengers on Satoshi’s virtually endless rails, which allow alternative currencies to move around the planet without reference to any physical, political or economic boundary – and therefore beyond the control of any central bank?
“The ECB sees a digital euro as having the potential to usurp the dominant position of the mainly US-based payment giants”
This made them very nervous, because they believe that without such control the planet’s fragile financial structures could collapse at any time, as actually happened in 2008, when commercial banks that we believed couldn’t fail went ahead and did.
The truth may be that central banks know that there will be occasional partial collapses but they believe that their centralised control means that failing structures can be repaired. The cost of running repairs can be rather high – the UK government alone spent an initial £137billion supporting the country’s banks in 2008, but the emphasis was on ensuring the economy kept grinding on. And it did. Just.
Decentralised cryptocurrencies do not allow such running repairs to be carried out. For all the ‘stability’ that the stablecoin crypto market segment promotes, their value depends entirely on market sentiment – and there is no safety net, no feasible central intervention, to stabilise the market. Clearly, central banks do not like cryptocurrencies, but they were aware that their launch was a genie that couldn’t be put back in the bottle. Central bankers decided pretty quickly (for them) that the adage ‘if you can’t beat them, join them’ should apply, which meant creating central bank digital currencies (CBDCs).
A CBDC is a digital token, issued by a central bank, whose value is pegged to the value of that country’s fiat currency. Essentially, CBDCs were initially envisioned as a centralised – and controlled – rival to cryptocurrencies. But the thinking behind them has moved on.
Here’s how it stands as of November 2022, articulated by Christine Lagarde, President of the European Central Bank: “We will continue to provide cash, but if it is used less and less for payments, public money could ultimately lose its role as the monetary anchor for the hybrid model, threatening its key function in securing trust in payments, with implications for the economy. Payments are a public good that is simply too important to be left to the market.”
And how does Lagarde envisage countering this threat?
“Issuing a digital euro would indeed safeguard people’s confidence that ‘ one euro is one euro’, allowing them to convert private digital money at par into digital central bank money,” she said. “It would ensure that money continues to be denominated in euros. And it would be based on a European infrastructure, facilitating intermediaries to scale payments innovation throughout the euro area and thus strengthen Europe’s strategic autonomy.”
This really isn’t about defending the euro against cryptos, though, because in the same speech, the ECB President remarked that ‘unbacked [crypto] variants – such as Bitcoin or Ether – are too volatile to act as a means of payment’.So, if there is no genuine threat from cryptos to cash as a payment method for the masses, why would the ECB bother to launch the digital euro?
Simple.
The ECB knows that Europe has never been able to create a rival to the big international card schemes. This failure has been underlined recently by the appearance on the payments landscape of the big tech wallets, led by Apple Pay. None of these new raptors of the payments industry is headquartered in Europe. The ECB sees a digital euro as having the potential to usurp the dominant position of the mainly US-based payment giants.
Europe’s Central Bank would be quite happy to see the fiat euro disappear entirely, so long as every Eurozone citizen uses the digital euro for all their payments.So, the digital euro, initially positioned as an alternative to cryptocurrencies, has now become just another weapon to be deployed in the war against physical cash. Sad – but predictable.
Can we detect a similar thread of thinking among other central bankers worldwide? Two central banks rushing into the CBDC era are the Nigerian and Indian. The Nigerian Central Bank launched its CBDC, the eNaira, in October 2021, thus becoming the first significant economy to implement such a product. This launch was no half-hearted matter. All businesses in Nigeria that accept physical cash – the fiat naira – are now also obliged to accept the eNaira for payments.
Despite significant promotion by the NCB, by September 2022 only 270,000 eNaira digital wallets were in use in Nigeria. Considering the population of the country is currently 219 million, this take-up has to be seen as disappointing. However, with the Nigerian government steadfastly anti-cash, the central bank may take the view that every little eNaira helps the move in the direction of the ‘cashless’ dream. India is another market where the government is seemingly obsessed with creating a ‘cashless’ society – however far from that position the country is at present. Sure enough, the India Central Bank launched the pilot of the digital rupee in December 2022.
No usage data is yet available, although the Indian authorities must surely be concerned by the poor results so far emerging from Nigeria.Meantime, in China, piloting of the digital yuan began in 2021. The consensus in the West is that this CBDC is ultimately intended to assist China and its allies to undermine the current position of the US dollar as the planet’s reserve currency.
However, it looks like ‘ultimately’ may be a very long way off.The success of the Chinese launch can probably best be judged from this quote in early January 2023 from a former director of the Peoples Bank of China, Mr Xi Ping: “The results are not ideal [and] usage has been low, highly inactive.”
So that’s Nigeria, India and China shakily on the CBDC bandwagon – with two of them finding that their citizens have so far shown little or no interest in the digital dreams of their central banks and are happy to continue to use their previously preferred payment methods. In Nigeria and India, for most that means cash. Apparently, around 80 central banks are currently seriously considering launching their own CBDC.
However, the most important of all the central banks – the United States Federal Reserve – is still in information-gathering mode. It is probable that a digital dollar will never appear; the fiat dollar works brilliantly for the US. Dollars are one of the United States’ most successful exports – and, of course, the great thing about fiat currency is that when it is exported, it often doesn’t ever return. Digital dollars would buck this helpful trend. They can return home at the tap of a screen, whether welcomed by the Fed or not.
If it isn’t broke, why fix it, is the likely Fed stance, when all things have eventually been considered.But what of the Bank of England, the UK’s Old Lady of Central Banking? In April 2021, the bank and HM Treasury initiated the joint CBDC Taskforce to coordinate the exploration of a potential UK CBDC.
The bank also set up the Engagement and Technology forums, where relevant stakeholders from industry, civil society and academia could provide strategic and technical input to the work on CBDC. Speaking at the time, Economic Secretary to the Treasury, John ‘Silicon’ Glen, said: “This consultation will begin an open discussion on the role a UK central bank digital currency might play in the UK.”
As of January 2023, it seems that no decision has yet been taken regarding the launch of a digital pound. However, on 10 January 2023, five UK associations – including UK Finance, which speaks for all major UK banks – announced that they have come together to form a new alliance; namely the UK Forum for Digital Currencies (UK FDC), which will ‘celebrate innovation and collaboration’ in the payments industry.
It is highly unlikely that this UK FDC would have been created without a nod from HM Treasury that the digital pound is soon to be let loose on an unsuspecting UK public.
A digital pound has a good fit with the anti-cash agenda that has been the goal for a decade or more. HM Treasury may well see this as being the final nail in the coffin of physical currency. However, in states where citizens continue to enjoy a healthy measure of payment choice, such as Nigeria and India, there is little evidence that the public wants to replace the fiat currency with a digital alternative. In China, of course, though the digital yuan seems to have little public appeal, the government is in the position to impose a ‘cashless’ future on 1.4 billion people.
Would a UK government dare to impose a digital pound on its electorate? We shall see.
This article was published in The Fintech Magazine Issue 27, Page 67-68
