Whilst sovereign fiat currency in the form of physical cash remains the only universally acceptable form of public money, innovations in cryptocurrencies and stablecoins can offer more effective forms of transactions and will continue to disrupt the finance industry.
Markets are evolving for Bitcoin (‘BTC’) and a wide variety of other specialised cryptocurrencies as well as stablecoins including central bank digital currencies (‘CBDC’).
Decentralised cryptocurrencies are enabling the ‘internet of money’ using blockchains to bring trusted transactions in otherwise trustless environments, and can also offer:
- Trust in open source code (with no central authority to manipulate monetary policy or censor transactions)
- Free self-custodied digital wallets with zero counterparty risk and peer-to-peer transactions
- New levels of security, with increasingly user-friendly interfaces
- More accurate price signals with disinflation (instead of inflation that amounts to regressive forms of tax)
- Near instant settlement and continuous transaction processing
- Borderless transactions
- Dramatically cheaper transactions
- Enhanced transparency (public blockchain based ledgers)
- Smart contracts (with auditable code) offering automation for financial contracts
Digital transactions can enhance growth and financial inclusion, whilst reducing poverty and physical crime. Digital wallets (including mobile wallets) are widely predicted to become the leading payment method, whilst cash transactions will continue to decline. In China, an estimated 85% of payments are made via mobile devices and 97% in a digital form.
Digital currencies, including cryptocurrencies and stablecoins, can disintermediate traditional banks and now pose a disruptive threat to central banks’ monetary policy effectiveness and governments’ monopolies on seigniorage.
Many Central Banks are responding with their own innovation in the form of a CBDC, as the European Parliament study, The Future of Money recommends. CBDCs and related projects are listed in the Appendix.
It seems ironic that whilst many traditional banks have objected to cryptocurrencies, the real threat to their existence comes from CBDCs that will have rapid and widespread adoption. The number of traditional banks will decline as economies of scale become more essential to compete in the digital payment market.
BigTech’s leading social messaging platforms look poised to include banking and payment solutions, which will cause further disintermediation of traditional banks that Bill Gates famously called dinosaurs back in 1994. Such platforms can provide a one stop shop with more global reach and scalability, along with a wide variety of other financial and non-financial services that enhance user experience with more convenience, accessibility, favourable terms and a degree of interoperability – all at a low marginal cost. The “killer app” element is potentially offering CBDCs to the public too.
- Tencent (owner of WeChat Pay) as a consortium with Alibaba’s Ant Financial (owner of Alipay) and others are creating new virtual bank(s). Moreover, these platforms already blend social media, e-commerce, payments, financial and certain non-financial services into single user-friendly apps
- Facebook Pay recently launched to integrate with Messenger, Instagram and WhatsApp (whilst its Libra digital currency is facing new regulatory hurdles)
- Google Pay app is expanding to offer an app platform with checking accounts with Citigroup and others
- Twitter and Square plan to integrate with cryptocurrencies, as could Telegram
Other reasons for CBDCs could be to mitigate the risks of:
- Financial exclusion as the use of cash plummets
- Financial isolation as banks in “high risk jurisdictions”, small countries and countries subject to sanctions, could be unable to maintain US correspondent bank relationships (risking financial isolation) when US banks “de-risk”
- China’s CBDC offered internationally via platforms including WeChat and Alipay may reduce the dominance of USD as the world’s reserve currency and China could mandate adoption for participants in its “Belt and Road” initiative
- As more countries launch CBDCs and potentially internationalise their offering, this could create ‘digital dollarization’
- The ‘network effect’ (which aids BTC’s dominance) suggests that earlier CBDC launches could gain a superior market share as adoption makes a medium of exchange more useful
CBDCs are an antithesis for privacy advocates that fear a rise of state surveillance, and for the 2.8 billion people that currently endure state dictatorships, the future could be increasingly dystopian.
It seems an obvious conclusion that to achieve a balance of accessibility with the rewards and risks of new innovations in digital currencies, CBDCs, cryptocurrencies and other stablecoins (in both decentralised and centralised forms) should be permitted to coexist using technology agnostic regulation to maximise freedoms of choice and innovation, whilst minimising incentives for (i) corruption by any centralised authorities and (ii) monetary policy manipulation.
The Moore Global Network, including our global leaders, David Walker and Andries Verschelden from Moore Cayman and Armanino LLP respectively, can serve a wide variety of client in the digital asset space. We have specialist industry knowledge and experience as auditor to approximately 30 cryptocurrency investment funds and some industry leading companies. You are welcome to join our LinkedIn group for Cryptocurrency and Blockchain and please contact us for more information.
APPENDIX – Central Bank Digital Currency projects
|Central Banks||Digital Currency||Announced||Status||Distributed Ledger
|Bahamas, Central Bank of||Sand Dollar||2018||Pilot||NZIA|
|British Virgin Islands||BVI~LIFE™||2019||Pilot||LIFEBaaS|
|Cambodia, National Bank of||N/A||2017||Development||Hyperledger Iroha|
|China, People’s Bank of||DCEP||2016||Launching 2020||–|
|Curacao & Sint Maarten, Central Bank of||–||2018||Pilot||Bitt|
|Eastern Caribbean Central Bank||DXCD||2019||Pilot||Bitt|
|Estonia||Estcoin||2017||– Launch prohibited by ECB –|
|European Central Bank (18 central banks)||EUROchain||2019||Development||Corda|
|France||Digital Euro||2019||Pilot Q1 2020||–|
|Ghana, Central Bank of||e-cedi||2019||Development||–|
|Iran, Central Bank of||PayMon||2019||Pilot||Phoenix Network|
|Marshall Islands, Bank of the||Sovereign (SOV)||2018||Launching||SOV Trust Network|
|Norway, Central Bank of||–||2019||Pilot||–|
|Saudi Arabia Monetary Authority||Aber||2019||Pilot||–|
|Senegal, Central Bank of W. African States||eCFA||2016||Launched||–|
|Singapore, Monetary Authority of||Ubin||2016||Development||Corda|
|Sweden, Central Bank of||e-Krona||2017||Development||–|
|Thailand, Bank of||Inthanon||2018||Development||Corda|
|Tunisia, Central Bank of||e-Dinar||2015||Development||–|
|Turkey, Central Bank of the Republic of||Turkcoin||2018||Development||–|
|UAE Central Bank||Aber||2019||Pilot||–|
|Uruguay, Central Bank of||e-Peso||2017||Launched||–|
|Venezuela, Central Bank of||Petro||2017||Launched||NEM|
|Adapted from: THE BLOCK|