2021 ushered in a new wave of curiosity and interest as the price of bitcoin (BTC) surged and broke new records of $40,000. Undeniably, corporations and governments have become even more interested in cryptocurrencies and accelerated ongoing efforts to disrupt the age-old financial systems with Central Bank Digital Currencies (CBDCs).
CBDCs basically lie in the intersection of cryptocurrencies and physical fiat currencies, adopting the concept of a distributed ledger technology. Instead of just one database storing all the financial records, specific financial entities help to manage them, which fall under the purview of the central bank. As such, this network eradicates the need for intermediaries and provide a more secure interoperable digital payment instrument, making transactions much easier and cheaper.
However, due to the novelty of these digital finance technologies, there exists a slight disparity in the global response – China being in the advanced stage of their digital yuan project, and the Western economies – Europe and U.S. who have adopted a more cautious stance and slower pace.
Europe – Not ‘racing to be first’
Europe has been relatively quiet about its CBDC progress over the years, discussing possibilities and analysing its potential. However, on Jan 8 2021, the European Central Bank (ECB) made an unexpected move where it sought public opinion on Twitter of a CBDC implementation. After which, during the Reuters Next conference last week, president of ECB, Christine Lagarde unveiled plans to launch the digital euro which “complement cash, not replace it”. It will be used as a digital representation of the conventional fiat euro for transactions by Europeans and firms, promoting financial inclusion. Still, more concrete decisions will only be made in April 2021 as much of ECB’s current concerns with CBDCs is based off the impacts on its monetary sovereignty.
Nevertheless, this announcement presents much optimism as Lagarde’s ECB has begun to recognise the benefits to modernise its financial sector.
U.S – ‘CBDC will be years, not months away’
Although the U.S. still leads in the innovation of blockchain-based technologies, its progress in CBDCs has been relatively lacklustre. Nearly after 2 weeks into the new year, Jerome Powell, chairman of the US Federal Reserve announced that the country will ‘go slow on CBDCs’ and felt that they are already ahead because the “U.S. dollar is the reserve currency”.
His complacent and narrow-minded outlook appears to completely disregard China’s digital yuan potential as a stable and credible alternative in years to come. Indeed, this is echoed by the strong resistance amongst commercial banking lobby groups as they are concerned that their roles in the money creation process will weaken.
Hopefully, with Treasury Secretary nominee Yellen and SEC Chairman’s Gensler reining in the helms, they can bring more regulation clarity to the landscape and build trust to foster the development of CBDCs within a better controlled environment.
In particular, with Facebook’s Diem (previously known as Libra) project and many research efforts underway, the U.S. government has to be prepared to adopt a more proactive role in shaping public-private partnerships to chase up in this race.
Moving Forward
What is certain is that whoever leads this race will definitely gain a significant leap to champion other financial innovations in this field. Yet as China appears to be inching closer to their goal of issuing a CBDC, the West is still adopting a wait-and-see approach. Should China’s digital yuan pilot project take off, will all this be too little and too late by the time the West steps in?
[ Read more: Russia to get its first stablecoin ]
