While the world is still fighting hard every day to get the coronavirus under control, another “cold war” is happening the background, the future of our money; the so-called Central Bank Digital Currencies (CBDC). Digital bank money is nothing new; worldwide only 8% of the money used is cash, the rest digital and in some European countries this is even less than 1%. The big difference with CBDCs is that the money is managed by a government and not a commercial bank. The revolution around cryptocurrencies and the underlying blockchain technology has sparked this discussion but has been accelerated over the past year by Facebook’s Diem (formerly Libra) project and the announcement that China is well advanced in developing its own CBDC. What is a CBDC, what are they used for and what can you expect? In this blog you will find all the information
It’s going to be the biggest change in the global financial system after Bretton Woods, according to experts. While in the early years of Bitcoin and blockchain the technology was still dismissed as “criminal” and “unnecessary”, in recent years the discussion has turned completely and most countries and economic regions have now started developing their own digital currency. According to research by the ‘bank of banks’, the Bank of International Settlements (BIS), dozens of central banks are now working on this, representing 80% of the world’s population and 90% of economic activity worldwide and will be 20 in the next 3 years. % of the world’s population have access to it.
“The euro belongs to Europeans and we are its guardian. We should be prepared to issue a digital euro, should the need arise.” Christine Lagarde, President of the ECB
In addition to Facebook and China’s announcements surrounding its own digital currencies, corona has given the discussion an extra boost, according to the European Central Bank (ECB). But it’s not just the pressure from other governments, technology companies and the sharp decline in the use of cash; according to the Dutch National Bank, it can also be used to implement monetary policy, such as reforms around debt and a basic income. According to the Russian Central Bank, their digital ruble is mainly intended to restore power over money to citizens and the Chinese Central Bank has indicated that it will not compete with existing payment apps.
The main reason for many central banks to develop their own CBDC remains the risks that commercial banks, such as ING and Rabobank take. According to a recent report by the Dutch Government’s Scientific Council, 10 years after the credit crunch, the commercial banking industry is still vulnerable to major blows. Especially in view of the consequences of corona and the risks that the banks still take, central banks want more control over the money flows. Now that the cash, which they manage themselves, is declining sharply and the influence of tech companies on the financial sector is increasing sharply, setting up their own digital currency is a logical step.
What a digital Euro can look like is clearly shown by the first CBDC recently launched in the Bahamas, the Sand Dollar and the many public experiments with Chinese CBDC, the DCEP. Many experts are frantically looking at the experiments in China, which will reportedly launch the coin globally during the 2022 Winter Olympics, to be held in the country. The country made the first banknotes in our global history and now sees 90% of all payments go through the popular apps WeChat and Alipay, the same size as the worldwide payment of Visa and Mastercard credit cards.
The totalitarian state
According to the government, it is not only a response to Libra, but mainly intended to remove all kinds of layers in payments and thus prevent corruption, combat poverty better and, according to many experts, also to control much more tightly where the money goes. This is also the biggest fear of residents of Europe, according to a recent survey by the ECB. The Chinese government is already going a long way with the control of its citizens, because of the more than 100 million cameras that hang in the country, the ‘social credit’ system and the countless algorithms that automatically determine on big data whether you are a criminal or not.
If, with this information and power over the money, it can also determine (by programming this in the code) whether and what citizens can spend the money on, then you are taking away a significant portion of the freedom. Imagine that a government programs that you can spend money on rent and healthy food, but not on fast food, cigarettes or porn. Or worse; because algorithms think you are engaged in criminal activity, your digital wallet is completely blocked. Due to the “social credit” system, already 23 million Chinese are no longer allowed to leave the country, because their score is too low.
Even though most Chinese are not yet so enthusiastic about the Chinese DCEP, the government was able to get its citizens to create a digital wallet in a very smart way. Everyone who had installed a wallet on their phone received the digital currency deposited on it. “Free money for everyone,” historian Rutger Bregman would say. The adoption of this currency can therefore go very quickly. African countries are already preparing to use the currency in trade with China, and Huawei’s latest phone models already include a DCEP app. Investment bank Goldman Sachs expects the DCEP to be used by at least 1 billion users in 10 years and to facilitate nearly 20% of all payments in China.
“We need to make sure that our currency is fit for the future. Inaction is not an option.” Fabio Panetta, boardmember ECB
Behind the scenes, Europe is also working hard on its own “digital Euro”. European finance ministers, such as Germany’s Olaf Scholtz, have urged to do everything in their power to have an “answer” to the Chinese plans as soon as possible. Several European countries are already experimenting themselves, such as Italy, Ukraine and the Netherlands that even say they want to play a pioneering role in this. The European Central Bank has indicated in a recent report that it will only make a final decision in the summer of this year whether it wants to issue its own digital Euro and its president, Christine Lagarde, recently indicated that if the ECB decides to do so, it will certainly will take until 2025 before it is actually there.
The American Kodak moment
Also on the other side of the ocean, a fierce discussion about a digital dollar is raging. The head of the American bank has sparked the discussion here with the statement “we do think it is more important to get it right than to be first and getting it right”. However, experts point to the “first mover advantage” that China will have on the global financial scene, with all the consequences that entails. The Chinese government has already indicated that it would like to cooperate with other central banks worldwide, but with the aforementioned, far-reaching functionalities that the DCEP will have, this is mainly viewed with fear rather than enthusiastically worldwide.
There are still a lot of snags that need to be worked on before such coins can appear on the world stage, in my view. The more central the power over such a currency, the easier it is to hack. But also the informal economy, in which 60% of all jobs worldwide function and come under pressure from government regulated money. The International Monetary Fund also continues to question monetary stability, which can be affected by central bank issuance of their own currencies. The speed at which developments are currently taking place on the world stage are fascinating, but also frightening, when you consider the expected consequences of shifts in power. The coming year will therefore be a very interesting and important year for the global financial system.