If you’re a central banker, the advent of crypto has elicited two reactions. The first is concern. Private companies could begin to have considerable sway over the supply of money, by minting millions of tokens, without any oversight from you.
Or they insert themselves in financial markets, into investors’ portfolios, and somewhere down the line it ends up with you doing the unthinkable: an intervention in markets that is tantamount to a bailout for people of questionable integrity or motivations.
The second reaction is more open-minded: acknowledging that money is always changing and the arrival of computers is having profound consequences for society.
In many societies, the use of cash is already declining and payments are being made by contactless cards and phones. But finance and technology tend towards the creation of large monopolies that prevent new entrants from making serious inroads into a market.
The central banker may realise the need to harness the technology not only for the bank’s own policy purposes but to keep the payments system open to competition.
These drivers have meant virtually every central bank in the world has begun exploring the possibilities of issuing their own digital currency. Generally speaking, it would work much like the money does now — used to make payments and transfers and held as a store of wealth in a digital form.
But because it is issued directly by the central bank and not a commercial bank, the settlement is instant and is risk-free credit. It would be managed and tracked on a distributed ledger, a shared register of deals but limited to fewer approved actors.
The nearest thing the crypto industry has to this is a stablecoin, but the crucial difference — aside from the lack of a token to incentivise trading and speculation — is that the central bank currency is truly backed by sovereign money. A sum of £100 really is £100 and there are no questions that need to be asked over the reserves backing it.
“Electronic money at the moment is only as good as the promise of the commercial bank that’s issuing it; it’s not central bank money,” said Ross Buckley, a professor at UNSW Sydney’s law faculty.
China is probably the country most ahead in its efforts to push ahead with a central bank digital currency (CBDC), but this week Russia tried to catch up with the launch of a test pilot phase of its own digital currency.
It is starting with 13 banks testing the digital currency on real customers — involving 600 people and 30 companies from 11 cities. Next year, the central bank hopes to include more banks. Another 19 have expressed an interest.
The early plans are to test basic transactions, including person-to-person digital rouble transfers, before rolling out QR code-based payments and business-to-business transfers.
“The whole idea behind this is to try and enter this very new market of digital currencies and not to lag behind,” said Sofya Donets, Renaissance Capital’s chief economist for Russia and the Commonwealth of Independent States. “The reality of digital assets has been frightening to central banks for three to five years now.”
But this is Russia, whose economy and currency are straining under the weight of the Ukraine war and the sanctions imposed on it by the US, EU and UK. Inevitably some within Russia have portrayed the digital rouble as a way to escape the bans. The western commercial banks and market operators are the main institutions responsible for sanctions compliance.
“The digital rouble really takes us to a different level in terms of our payment technologies in the country as a whole, and enables us to build cross-border payments with the countries that are also set to issue national digital currencies,” Olga Skorobogatova, Bank of Russia’s first deputy governor, said at a press conference last week.
But it’s hard to see how this stands up. The sanctions are designed to stop the flow of hard currencies such as dollars and euros flowing into Russia and to cut off individuals’ access to the western financial system. Payments in Russia are unaffected, nor are payments that exchange roubles for other currencies such as the renminbi or rupee.
A rouble is still a rouble, digital or otherwise. This week, it touched 100 to the dollar, sparking an emergency meeting and interest rate rise from the central bank and talk of currency controls. As Vladimir Milov, a former deputy energy minister, told my colleagues this week, “no one wants roubles”.
Like many a crypto innovation, it leaves one asking what it does that existing payments system (if they’re modern) can’t already do. The one thing a CBDC does is leave an electronic trail.
And already in Russia, the digital rouble has stoked fears that the financial privacy of its users is at risk — a final irony for a payments system inspired by technology that once set itself up as an anonymous alternative.
A survey for Russian Forbes at the start of August found more than 65 per cent of 1,250 companies polled did not see the benefit of a digital rouble, 15 per cent worried about state control of the currency and only 3 per cent thought it would simplify cross-border payments in the face of sanctions. A special thanks to my colleague Daria Mosolova for translations.
The Bank of Russia did not directly respond to a request for comment about concerns surrounding financial privacy, but it has previously tried to dispel concerns.
However, even then some wonder if privacy is any stronger in the current financial system. “The level of financial privacy in Russia is already low,” said one former Bank of Russia employee. “We are moving in this direction already but a digital rouble doesn’t have to be part of that shift . . . it’s costly to create a CBDC [and] if your goal is removing financial privacy, you can just pass laws to do that for free,” the person said.
What’s your take on Russia’s foray into CBDC territory? As always, email me your thoughts at [email protected].
Weekly highlights
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As 2022 grew to a close, Binance’s chief executive Changpeng Zhao appeared to have a clear route to true crypto stardom. But after a litany of regulatory failures, Binance has lost market share throughout 2023, potentially blowing its chance to rule crypto. Check out my deep dive into the company here, packed with interviews with former employees and previously unreported details about the inner workings of Zhao’s empire.
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Another “crypto-friendly” US financial institution hit the buffers. Prime Trust, one of the few with some regulatory approvals to operate in the traditional US banking and payments system, has filed for bankruptcy protection.
Soundbite of the week: Coinbase scores a regulatory win
Coinbase this week secured approval to offer crypto futures for retail customers in the US as a futures commission merchant (FCM).
Christopher Perkins, president of crypto investment company Coinfund and former head of OTC clearing at Citigroup, described the move as a “big deal” on social media platform X.
There was a gap in the market, he said: fewer brokers are taking on the role of an FCM and traditional markets infrastructure is struggling to keep pace with speedy crypto markets. Read more here.
As we’ve seen in crypto, we’ve had issues with counterparty risk with FTX, Celsius et cetera . . . for someone like Coinbase to step into the void, that’s a huge win.”
Data mining: a new stablecoin on the block
Binance has been helping selected less-known stablecoins with free trading promotions on its venue ever since regulators in New York halted the issuance of BUSD, a Binance-branded stablecoin.
Among them are TUSD, a once-unknown stablecoin that this year entered the big league after Binance decided to include it in its zero-fee promotions to customers.
Another one popped up this month: FDUSD stablecoin jumped by roughly 1,410 per cent in August after the dollar-pegged token launched on Binance with a zero-fee trading promotion. It was developed by First Digital Labs, a public trust company, and issued in Hong Kong.
It has already become the fifth-most active stablecoin pair on Binance, according to fresh numbers shared with the Financial Times by data provider CCData.
FT Cryptofinance is edited by Philip Stafford. Please send any thoughts and feedback to [email protected]
