As noted in an earlier article, the European Union (EU) debate around the introduction of a Digital Euro is one that needs to measured against the efforts being made around the world by non-EU on similar initiatives. Brussels can’t afford to be left behind here, although it’s already perceived to be lagging.
According to a global study of Central Bank Digital Currencies (CBDC) conducted by PwC, Nigeria leads the world here with its e-Naira, launched in October last year. It’s followed by the likes of the Bahamas, China and Jamaica, all countries with live or near-live digital currencies on offer. (Incidentally, the number one country in Europe for CBDC is Ukraine.)
Much of the effort that’s been put into such CBDCs comes back to political intent, suggests the PwC study:
All digital money, whether issued privately or by the state, can be monitored and controlled. Whether that is a desired feature or not differs, country by country. However, people do bad things with money of all types and frameworks that help track and prevent such things happening are essential. The more transparent and simpler they operate, the better. More broadly, the frictional cost of any type of money within an economy does not add value. Removing such cost is a smart move. Whilst CBDCs offer a way through some of these challenges, the user they are put to is ultimately motivated by a government’s policy, eclipsing all other factors.
US exceptionalism
So where are the likes of the US and Brexit Britain in all this? In the US, five Democrats have just proposed a bill – the Electronic Currency and Secure Hardware (ECASH) Act – which they argue, according to US representative Stephen Lynch, help the country take a lead in the emergence of digital currencies:
As digital payment and currency technologies continue to rapidly expand and with Russia, China, and over 90 countries worldwide already researching and launching some form of Central Bank Digital Currency, it is absolutely critical for the US to remain a world leader in the development and regulation of digital currency and other digital assets.
Specifically the ECASH Act, if passed, would trigger a two-phase initiative to create a Digital Dollar that would be developed with consumer safety and privacy, financial inclusion and equity, and anti-money laundering and counterterrorism compliance underpinning it. Lynch added:
By establishing a pilot program within the Treasury for the development of an electronic U.S. Dollar, the ECASH Act will greatly complement and advance ongoing efforts undertaken by the Federal Reserve and President Biden to examine potential design and deployment options for a Digital Dollar.
The US Federal Reserve itself has been active in promoting debate around such a Digital Dollar, noting that such a development would help to stem off a nightmare future in which other nations efforts on this front resulted in CBDCs that were more attractive, undermining global use of the dollar. In a study back in January, the Federal Reserve noted:
The Dollar is the world’s most widely used currency for payments and investments; it also serves as the world’s reserve currency. The Dollar’s international role benefits the United States by, among other things, lowering transaction and borrowing costs for US households, businesses, and government. The dollar’s international role also allows the United States to influence standards for the global monetary system. Today, the dollar is widely used across the globe because of the depth and liquidity of US financial markets, the size and openness of the US. economy, and international trust in US institutions and rule of law. It is important, however, to consider the implications of a potential future state in which many foreign countries and currency unions may have introduced CBDCs. Some have suggested that, if these new CBDCs were more attractive than existing forms of the US dollar, global use of the dollar could decrease—and a US CBDC might help preserve the international role of the dollar.
There are more home-grown benefits, the report added:
For example, it could provide households and businesses a convenient, electronic form of central bank money, with the safety and liquidity that would entail; give entrepreneurs a platform on which to create new financial products and services; support faster and cheaper payments (including cross-border payments); and expand consumer access to the financial system.
But as with the EU’s thinking, Washington is conscious of potential problems ahead:
A CBDC could also pose certain risks and would raise a variety of important policy questions, including how it might affect financial-sector market structure, the cost and availability of credit, the safety and stability of the financial system, and the efficacy of monetary policy.
And even in a nation that continues to struggle with the idea of Federal level privacy regulation and protection, the subject of personal rights won’t go away:
Protecting consumer privacy is critical. Any CBDC would need to strike an appropriate balance, however, between safeguarding the privacy rights of consumers and affording the transparency necessary to deter criminal activity.
Solution in search of a problem?
Meanwhile in the UK, no longer subject to Brussels in terms of making decisions, the supposed freedom to charge ahead with its own CBDC thinking doesn’t seem to be happening. In fact back in January, the Economic Affairs Committee of the UK Parliament’s upper chamber, the House of Lords, dismissed CBDCs as “a solution in search of a problem” and declared that there is no convincing case for the UK to introduce one.
The Committee argued that while there might be some advantages to be had in terms of speed of settlements or faster cross-border payments, these were outweighed by privacy concerns and a supposed threat to financial stability. Lord Forsyth of Drumlean, Chair of the Economic Affairs Committee, said:
The introduction of a UK central bank digital currency would have far-reaching consequences for households, businesses, and the monetary system. We found the potential benefits of a Digital Pound, as set out by the Bank of England, to be overstated or achievable through less risky alternatives.
But HM Treasury is dipping its fiscal toe in the water with the announcement of the introduction of stablecoins as a recognised form of payment. This is all part of a grand plan, says Rishi Sunak, the UK’s Chancellor of the Exchequer, to make Brexit Britain a “global crypto-asset hub”. The UK’s stablecoin will be regulated by the government in order to give businesses the kind of confidence they need to think and invest long-term, he added, which may seem to some to be an example of hope over reality given the current state of the economy:
It’s my ambition to make the UK a global hub for crypto-asset technology, and the measures we’ve outlined today will help to ensure firms can invest, innovate and scale up in this country. This is part of our plan to ensure the UK financial services industry is always at the forefront of technology and innovation.
Others are jumping on the bandwagon in the UK. The disgraced former Health Secretary and former Digital Secretary Matt Hancock has been out and about as part of his (none-too-successful) political rehabilitation tour, delivering ‘important’ speeches on the subject. The latest, given to the London Crypto Club in front of an digital fireplace in the week that UK energy prices rose by over 50%, was met with inevitable derision as fellow Tory MP Chris Skidmore posted on Twitter:
The average household uses 242kwh of electricity a month. A single bitcoin transaction uses 1,173kwh of electricity. At a time when we need greater energy security to meet demand, that’s a lot of electric logs to be throwing on the fire.
Still, with Hancock on the case and forward-thinking from the House of Lords, Brexit Britain’s CBDC prospects must be pretty good/bad/chaotic – delete as applicable.
