The Breakdown - Should We Care if the US Is Falling Behind on CBDCs?

Episode Date: October 25, 2020

For this week’s Long Reads Sunday, NLW reads two selections from CoinDesk’s op-ed section: CBDCs Are Evolution, not Revolution - Benoit Coeure  The US Risks Getting Left Behind on CBDCs - JP Schnapper-Casteras & Misha Guttentag

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, nexo.io, and elliptic, and produced and distributed by CoinDess. What's going on, guys? It is Sunday, October 25th, and that means it's time for Long Reads Sunday. And today, as I sometimes do, I'm actually going to read two shorter people. pieces that I think go together and frame an important conversation that's on the rise right now. The discussion of central bank digital currencies heats up it feels by the week. We keep seeing international organizations talking more about them, but I think even in the last week,

the biggest thing that I saw was that PayPal was so clearly thinking about CBDCs when they were releasing their new cryptocurrency features. They clearly want to be a layer that interoperates between those digital currencies and every other type of digital currency. But with that background, it's worth exploring what some others are discussing in the space. So today we're going to have two pieces. And the first comes from Benoit-Wa. Ben-Wa is the head of the innovation hub at the Bank for International Settlements and a member of the bank's executive committee. He was previously a member of the Executive Board of the European Central Bank. From 2013 to 2019, he chaired the BIS's Committee on Payments and Market Infrastructures, so what I'm saying is that this first piece is from

the Insider's Insider, and it's titled, CBDCs mean evolution, not revolution, and it was on CoinDesk this week. Who wants a central bank digital currency? Plenty of people, apparently. Industry groups are advocating digital cash. Millions of people have reportedly signed up to a lottery to receive digital Renminbi in Shenzhen as part of the Chinese Central Bank's pilot project, and the Libra Association wants to integrate CBDCs. Technology firms, banks, NGOs, and consultancies are now jostling to ride the next wave of innovation. Earlier this year, 80% of the world's central banks had already started to conceptualize and research the potential for CBDCs, 40% were building proofs of concept, and 10% were deploying

pilot projects, according to BIS research. Central bankers believe digital cash could be a useful addition to their toolbox, combining the safety of central bank money with electronic convenience. Safe electronic money is hardly revolutionary. For most people in advanced economies, good banking services with deposit insurance are freely available. Nonetheless, concerns have been raised that a super-safe, super-convenient new kind of money could crowd out bank deposits and starve an economy of credit in normal times, while nascent insecurities could snowball into faster-than-ever bank runs thanks to how easy it could be to move savings into digital cash. For a start, a CBDC would ensure that as our economies go digital,

the general public would retain access to the safest form of money, held as a claim on a central bank which can never go bust. And this will be in a form they could use freely in their daily lives. A CBDC would be a kind of digital banknote and, as such, could satisfy more use cases than paper, while the issuer, being a central bank, could support liquidity, settlement finality, and trust in the value of the currency. As a result, it could promote payment diversity, help make cross-border payments faster and cheaper, foster financial conclusion, and even facilitate fiscal transfers in times of crisis, such as the current COVID-19 pandemic. Balancing these opportunities and risks is a significant practical and technical challenge. A recent report from the Bank for International Settlements

in the Central Banks of Canada, the Euro area, Japan, Sweden, Switzerland, the United Kingdom, in the United States, sets out the principles and offers a guide to navigating these uncharted waters. It also puts forward the equivalent of a monetary Hippocratic Oath, pledging that any potential CBDC should do no harm to central bank's monetary and fiscal stability mandates. In fact, it goes one step further, stating that a CBDC should complement not replace cash and safe private money in a new monetary ecosystem that nurtures innovation in private competition. CBDCs are more than just another way to pay. They could, be the evolutionary foundation for a new, publicly accessible platform to encourage diverse

ecosystems of banks and fintechs, avoiding the winner-takes-all networks we have seen emerging in our daily digital lives, and making sure innovation benefits the many, not just a few. The exact design will vary by jurisdiction, as well as the extent to which a CBDC will seek to be a neutral means of payment or a new way to do monetary policy. Answers will vary by central bank, as will many other design choices, and will likely involve extensive consultations with the private sector and the public at large. But if a CBDC is a matter of national taste, why and how should central banks work together across borders? That's where the Bank for International Settlements and its innovation hub come in. The BIS is owned by and run for more than 60

central banks around the world. We started out in 1930, but we focus on the future. We are serious about exploring CBDCs because central banks realize that this provides an essential opportunity to pool knowledge and resources, as well as build systems that complement each other and help make many cross-border payments faster, more transparent, and cheaper. The Innovation Hub is building technological capacity with its host to help central banks design workable solutions to emerging challenges. By the end of this year, we plan to publish our first wholesale CBDC proof of concept with the Swiss National Bank.

This will pave the way for experiments on the building blocks of a retail CBDC, which might include interlinkages with existing payment systems, application programming interfaces for distribution, digital identity rails, compliance monitoring, cyber or counterfeiting resilience and offline functionality. To help this, we will grow our own blockchain capacity. This work is directed towards practical solutions rather than the conceptual research of recent years. CBDCs will not usher in an age of prosperity or solve the raft of social issues. That is beyond the scope of any currency. They are not a revolution or an end in themselves. Yet they might be a way of achieving a more inclusive, accessible, safe, and convenient form of money.

They might support a more diverse payment ecosystem nationally and internationally, and, if developed astutely, provide a new form of global public good. So the really notable thing here is that the Bank for International Settlements has clearly deployed Benoit to hone the narrative of CBDCs. And there's two parts. One, they're definitely trying to own this narrative. This is a new uptick in the narrative war, I would say, and they're trying to have their framing, evolution, be the one that people know. Second, I think you can see undertones of concern about competition from private alternatives. I believe if you read through the lines, there's still a bunch of fallout happening from the Libra experiment going live. Third, this should make it very clear that when

we're talking about CBDCs, we're not talking about some radical out-of-state cryptocurrency. We're talking about a solution that is fully owned and operated by central banks and allows them to be even more central banky. When we discuss them, we need to have that context constantly. Despite the fact that a similar technology might underpin a central bank digital currency and a permissionless censorship-resistant blockchain, these are not the same thing. This episode is brought to you by crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the Crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the Crypto.com

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digital currencies as well, and this one relates to the U.S. This one is by J.P. Schnapper Kastaris and Misha Gutintag and is simply called the U.S. risks getting left behind on. on CBDCs. This week, as world leaders gather virtually for DC FinTech Week in Washington, DC, a key focus will be on central banks issuing their own digital currencies. A pivotal player here is the United States, which faces an increasingly urgent decision, whether to take serious steps towards issuing a CBDC as the Bank of China and others have begun. The sooner it decides, the better. Many countries are addressing this issue seriously and quickly, as

surveyed by tracking projects at the Atlantic Council and elsewhere. Pilot programs are ongoing in multiple nations, most notably China, which recently ran a trial with 50,000 residents of Shenzhen, reigniting concerns about its rapid progress and geostrategic implications. By contrast, the U.S. remains comparatively cautious and quiet. On CBDC's Federal Reserve Chairman Jerome Powell said this week that it is more important for the U.S. to get it right than to be first. The most concrete exploration is at the Federal Reserve Bank of Boston, which is collaborating with MIT to survey 30 to 40 available technologies over two to three years. Treasury Department officials hint more work is happening behind the scenes, but little has been made public. If the U.S. wants to lead on CBDCs, there is much

more it could reasonably do and soon, even short of being first. It could test out several pilot projects at the same time as underscored by the Digital Dollar Project, a group led by Christiane Carlo, former chairman of the Commodities Futures Trading Commission, and along the lines of what the Bank of France and People's Bank of China are already undertaking. U.S. stakeholders, including Congress, should start wrestling with the crucial and complicated issue of the digital dollar's design, including the paramount issue of privacy. Giancarlo stressed that may turn out to be the ace to play in the contest for the future of digital money and could help contrast the digital dollar against other nations' CBDCs that reflect

different values and priorities. If, on the other hand, the U.S. wants to continue waiting while other countries move forward with CBDCs, it could lean into a substantial role for the private sector. The prospect for private sector digital dollars scared some policymakers when Facebook announced its Libra cryptocurrency last June. But recently, Powell and his colleagues have started looking favorably at different forms of private sector collaboration. In the absence of a clear national policy, the private issuance of digital dollars is already happening, evidenced by the surge and privately issue crypto dollars. Moreover, the Treasury's Office of the CompTroller of the currency recently gave banks the OK to hold bank reserves on behalf of certain digital dollar issuers. If the U.S. engages

the private sector, we believe it should embrace and demand the model that worked for the early internet, open source and interoperable technology standards. At one level, the Federal Reserve's current wait-and-see approach is understandable. It is a historically conservative institution, and, as the issuer of the world's reserve currency, has much to lose if its CBDC efforts flounder. Cybersecurity flaws might scotch a digital dollar launch, for example. Still, there is surely a greater cost to all this waiting. As CFDC Chairman Heath Tarbert candidly admitted on Monday at DC FinTech Week, quote, the only thing that scares me is the U.S. falling behind on CBDCs. Other countries that move earlier on CBDCs may stand to gain from that first

mover advantage, reaching or surpassing the United States on infrastructure, establishing industry standards, or expanding their spheres of influence via digital currency adoption. Domestically, moving too slowly and maintaining the status quo could deprive the U.S. of new and important fiscal and monetary tools, including the ability to rapidly and precisely disseminate stimulus funds directly to citizens during a recurring pandemic or lingering depression. In the worst case, the U.S. would muddle along the next few years with the worst of both worlds. Neither material progress on national financial infrastructure, nor enhanced regulatory clarity or open standards for private providers. The United States faces a pressing decision on whether to join other

countries and start working openly and urgently on a digital currency that would complement paper cash. As tough as the decision may be, what could be even worse is waiting and getting left behind. So just a quick follow-up on this one. I think it's a reasonable thing to ask, especially when you're seeing so much content from people like me and others around central bank digital currencies, why should we care? And I've got a couple answers. The first is, I do think that this geostrategic consideration is real. The people who are argue it isn't mostly say things that implicitly argue that convenience won't immediately trump all the reasons that people prefer to transact in USD over something like the Chinese R&B,

but I don't want to overstate that case or overestimate that case. No, CBDC will not address many of the reasons why people find transacting in other currencies less trustworthy. However, convenience and speed matter in a world of finance. To the extent that the U.S. views its reserve currency status as a key geostrategic asset, it has to take this seriously. I think a bigger thing, at least for me personally, however, is that I believe that these central bank currencies are absolutely inevitable. I think that they give central banks too many powers and we're in a moment where central banks are getting more, not less power. I think the shape of CBDCs then has dramatic implications for the economy and for individuals

who use them. How they're designed has a huge impact on the rest of the banking sector. And to what extent that these currencies will actually undermine the way that the economy is run and the way that the credit system is run by having people opt out of the normal commercial banking system and opt to keep all their money just with the new central banking system? But I also think, and obviously if you've listened to me, you know this is even more significant for me, these could be the most powerful surveillance tools that banks and governments have ever invented. When you listen to Chris Giancarlo in his argument for why the U.S. should be the leader in digital, currencies, it is almost entirely about the fact that there is a constitutional mandate against

unlawful breaches of privacy. In his estimation, this means that by default, a U.S. digital dollar would be more private and more outside the purview of the government than something, for example, of China, which doesn't have any such mandate. Now, I think there's good reason to be, let's say, skeptical about how much the U.S. information establishment could actually keep its hands off of that honeypot of data. However, I do think that as citizens of this country, trying to have a stake in the conversation about how these things are designed and how much they protect private transactions and consumer privacy in general really matters. Being engaged now is a chance, the best chance we have, I think, to shape CBDCs in a way that would be better than just letting

them be designed by bureaucrats and by people who actively want that information and want less privacy in our monetary system. So if it seems like I'm talking about them a lot, that's why. Anyways, guys, I hope you enjoyed this reads today, and until tomorrow, be safe and take care of each other. Peace.