Fed Chairman Powell sees no urgency to develop a CBDC, but eventually, the world’s top central bank must act, say experts.
The Bahamas, an island nation in the West Indies, made digital currency history on Oct. 20 with the official launch of a new central bank digital currency, the so-called Sand Dollar. It became the first country to roll out a CBDC available to all residents, and while the Bahamas is a small nation — with only 393,000 people — it appears to be an event of some global financial significance.
Or is it? “It could be if it succeeds,” Ross Buckley, KPMG-KWM professor of disruptive innovation at University of New South Wales, Sydney, told Cointelegraph. “Other small island nations — as in my backyard in the Pacific — are watching it carefully and could well follow suit.”
James Barth, a finance professor at Auburn University, placed the event in the context of a series of CBDC milestones, beginning with the launch of Bitcoin (BTC) in 2009 and including Facebook’s Libra announcement in 2019, China’s CBDC trials in April, and the European Central Bank’s statement about the possible issuance of a digital euro in October. “These developments and the COVID-19 pandemic made it virtually certain that a country — most likely a small country — would go live with a central bank digital currency,” he said.
Some, however, said it was too early to tell. Hans Gersbach, an economics professor at ETH Zurich in Switzerland, told Cointelegraph: “First, we have to see whether it will function well in practice.” Jay Joe, CEO of Nzia Limited — the technology solutions provider for the Bahamas rollout — told Cointelegraph that the Sand Dollar was introduced in the Bahamas to help facilitate financial inclusion across the nation:
“The Bahamas as a vast archipelago spreading across over 100,000 square miles of ocean, has many remote islands and communities where residents do not have access to formal financial services.”
Because of population sparsity, it often isn’t economically viable for banks to build branches and sustain infrastructure. The new CBDC “enables the people of The Bahamas universal access to digital payments and extends the reach of financial services to all corners of the nation,” Joe told Cointelegraph. Among the key questions the nation’s central bank and others were looking to answer with the rollout, Joe said, were “how existing regulations and policies will be shaped, and, eventually, how the CBDC will be embraced by the people to some day become as ubiquitous as cash.”
A sense of urgency?
The global demand for online services has accelerated dramatically with the COVID-19 pandemic, and this is arguably driving the development of CBDCs around the world. As the deputy governor of the Central Bank of Canada, Timothy Lane, said recently. “If we want to be ready to develop any kind of digital central bank product, we need to move faster than we thought was going to be necessary.” Barth further explained:
“The virus has shifted behavior in favor of more social distancing and therefore greater use of online communication and transactions, both domestically and globally. This certainly makes digital currencies more relevant as money and for payments.”
But this sense of urgency isn’t universal, as Jerome Powell, chairman of the United States Federal Reserve, said on Oct. 19 at an International Monetary Fund event. He believes that CBDCs face many critical challenges, such as preventing fraud and cyber attacks, ensuring financial stability, and protecting privacy, saying: “There’s a great deal of work yet to be done. […] In fact, I actually do think that CBDC is one of those issues where it’s more important for the United States to get it right than it is to be first.”
The U.S. needn’t worry about losing the “first-mover” advantage with regard to a digital currency, Powell implied. Was he right? “Probably in the immediate sense, yes,” according to Buckley, who added: “Longer term though if China or another nation allows its CBDC to be used in international trade, the U.S. will have to respond and quickly.”
The U.S. draws extraordinary benefits from minting the world’s reserve currency, and the loss of exclusivity in that regard could cost the U.S. economy dearly. It would also have political consequences — for instance, placing many countries outside the scope of U.S. financial sanctions. Buckley believes that China’s “long game” is, arguably, to upend the U.S. dollar as the world’s reserve currency. “It [China] hates that the global economic system is built upon the U.S. dollar, and it aims to build a parallel system that it controls,” he said, further adding: “This was the impetus behind the denomination of trade contracts of other country’s exporters and importers with China in renminbi.”
It was also a motivation behind the New Development Bank established by the BRICS states — Brazil, Russia, India, China and South Africa — and also for the Asian Infrastructure Investment Bank, continued Buckley, referencing another multilateral development bank whose creation was proposed by China in 2009 to make better use of Chinese foreign currency reserves amid a global financial crisis. “A [Chinese] CBDC will interact really well with dematerialized digital trade documentation so if China allows DC/EP offshore it will be a total game changer. In time I think they will.”
Barth, for his part, agreed that the U.S. didn’t have to hurry to bring a CBDC to market, as the U.S is the world’s largest economy, accounting for 20% of global gross domestic product, and the U.S. dollar remains the world’s dominant currency. “Chairman Powell is right that the U.S. does not have to worry about losing any ‘first mover’ advantage by rushing to issue a central bank digital currency.”
On the other hand, Sidharth Sogani, founder and CEO of analytics firm Crebaco Global, told Cointelegraph that being first to market among large economies does matter. “China is already testing its CBDC. They have integrated POS machines, mobile apps and many other source codes to develop apps on their CBDC.”
He further opined: “First mover advantage is crucial in this case — especially when you are competing with China.” Financially, the U.S. is still dominant, but with regard to CBDC technology, it trails — “And here China is going to lead for sure as they are ready with their CBDC and are the second biggest economy globally.”
Sogani explained this from the point of view of a bank customer: “If you are already having a great experience with Bank A,” which uses a Chinese CBDC, “will you open an account or download an app with Bank B — which does business with a U.S. dollar CBDC?” If/when China launches its CBDC, it will attract large numbers of global customers very quickly. “It will be difficult to catch them.”
The U.S. should have a CBDC ready to go — just in case — suggested Gersbach. “Preparation should be stepped up in order to follow fast if successful models of CBCDs are introduced.” But according to Barth, the big question is how the “CBDCs will affect money and payments, particularly the role of the government.” Gersbach also outlined several other factors: “Preventing cyber attacks, privacy issues, and financial stability. Security of all kinds and financial stability are the two most important issues to be resolved.”
Sogani, assuming that CBDCs would be built on a blockchain platform, questioned how CBDCs would relate to Bitcoin and other cryptocurrencies. “It’s [a CBDC] a completely different thing, with different fundamentals and uses. Understanding the nitty gritty is the biggest challenge.”
How close is the first mass CBDC?
It seems that the development of CBDCs around the world has picked up in 2020, and if this is the case, when might one see the first massive-scale CBDC? According to Barth: “Most of the major countries have been studying CBDCs for some time now.” He added:
“China, of course, has been engaged in trials but with no information provided about a nationwide adoption date. Nevertheless, it is likely to be the first major country to issue a CBDC, and if so, it is likely to trigger other major countries to follow suit.”
Regarding China, Sogani said: “Their legal framework seems to be in the making. It will launch it for the masses in a few months. I don’t see any other country as close to China’s development stage.” Meanwhile, according to Buckley: “China intends clearly its digital currency/electronic payment project to dominate payments and money within China domestically, and they’ve been working on it for five to seven years.”
As long as the project remains domestic, there is no real challenge to the United States. But if China takes it global, “It will take the U.S. years of work to respond with a CBDC of its own, the so-called digital dollar,” said Buckley.
Meanwhile, Sogani sees big benefits, even for small countries — like the Bahamas — that take the digital path. “A CBDC enables a country’s currency to go global which the current financial ecosystem doesn’t offer.” To make an international transfer, ample paperwork needs to be signed and fees paid. “This is expensive. It takes up to two days and is complicated,” commented Sogani, adding:
“But if it is a CBDC, it can go directly to the mobile apps, and it can be tracked. Yes, there will be compliance but the SWIFT method, which involves nostro and vostro accounts, will be eliminated — making life simpler.”
Joe called the Bahamas’ rollout “the world’s first production-grade live implementation of a retail CBDC.” Asked if there were lessons here for other nations, the NZIA CEO told Cointelegraph that there were many, “including the importance of grassroots engagement and understanding of CBDC and its effects on the intermediated financial system,” further adding:
“A CBDC is more than elaborate software and mobile wallet systems. It needs to be designed from the ground up and built as part of a national payments infrastructure that addresses the needs of everyday people.”
In sum, there appears to be a certain global logic to recent events. Because the U.S. dollar, the incumbent global currency reserve, has much to lose by coming to market with a flawed CBDC, it appears to be moving cautiously, content to let smaller players such as the Bahamas do its beta testing. Meanwhile, China, the challenger, is moving fast, but its DC/EP project is focused on the nation’s mass market for now. A truly global digital yuan may still be some years away.
“A CBDC is a total game changer that raises a host of tough issues,” concluded Buckley. “This is why no one country has yet done it. Central banks never like stepping into the unknown — it’s not in their DNA for good reasons. But I think China will force other nations’ hands.”