Money without borders in a hot, flat and crowded world – GIS Reports

Countries are beginning to realize that they can benefit from more inclusive forms of device-centric money, payments and financial services.

To popularize its digital renminbi, China has distributed more than $40 million of the currency through virtual “red envelopes”, which are traditionally used to give money on special occasions. ©Getty Images
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In a word

  • Many governments are considering digital currencies
  • CBDCs are unlikely to replace traditional money
  • On the contrary, they could accelerate innovation in finance

Until recently, the idea that the world would be locked in a space race for digital currency sounded like an abstraction or science fiction. Yet today, 105 countries, representing 95% of the world’s gross domestic product (GDP), are studying, prototyping or deploying a digital national currency.

This does not necessarily mean that the digital currency race will be won by the public sector, but rather that countries around the world still fear being left behind if big tech enters the digital currency market. While one public sector fear never materialized with the abandonment of Meta’s (formerly Libra) Project Diem, the other – that China would launch a digital renminbi – did come to fruition and raised the stakes. for many countries to follow suit.

Digital Currency Space Race

China’s e-CNY made its debut at the Beijing Winter Olympics and, by some estimates, more than 300 million active accounts could already be using it. By itself, the number of users may not be a geopolitical concern, as much of the motivation for the People’s Bank of China (PBOC) digital currency efforts is country-focused and aims to defeat the country’s major technological players. The real concern is that Beijing’s digital currency could result in a shadow payment system that may not meet international standards, including post-9/11 financial crime compliance and sanctions regimes.

Whether or not to implement a CBDC remains a deep technological, policy and regulatory debate, with many complex and not yet fully understood risks.

These regimes, like the current technologies that move value around the world, look decidedly antiquated and vulnerable. Yet, as the economic sanctions against Russia have demonstrated, countries are not militarizing their currencies, but rather the underlying delivery mechanisms. When it comes to geopolitics and economics, the payment system matters more than the amount transferred.

As the transfer of value becomes not only digital, but also distributed and decentralized with the emergence of banking and device-centric payments (and software-mediated capital markets), borders may soon disappear. Digital money has met the hot, flat, overcrowded world of Thomas Friedman and central banks are unhappy with the prospect of eroding monetary sovereignty or accelerating digital dollarization.

The disappearance of cross-border payments

If the Internet democratizes access to knowledge and information by removing friction and traditional intermediaries, blockchain-based financial services (what some call Web3) could chart a similar path for the movement of money. We do not send cross-border emails, but trade freely and globally with trusted counterparties. Payments could become just as borderless as adoption of digital currencies by individuals and institutions continues to grow.

If Web3 augurs the emergence of an Internet of value, it goes without saying that Western values ​​of democracy, openness, trust and transparency should be enshrined in its code and conduct. This may well be the tech contest of our time, with close parallels to the 5G wars. The choice of hardware and software standards and vendors could align closely with either an open view of connectivity and competitiveness or an authoritarian view.

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Facts and figures

Increasingly positive perceptions of central bank digital currencies

Speeches by central banks
Although most policymakers were initially wary, many governments are now showing interest in having their own digital currency. A retail CBDC is issued to the general public, while a wholesale CBDC is intended for financial institutions and interbank payments. © GIS by macpixxel

To the CBDC or not to the CBDC

Faced with these choices, central banks around the world are considering how and whether to launch central bank digital currencies (CBDCs). Although the concept of a nationally issued digital currency is not new, based on central bank rhetoric, the idea only became popular in the summer of 2019, just when the Libra was announced (perhaps catalyzing China’s national blockchain strategy).

Whether or not to implement a CBDC remains a deep technological, policy and regulatory debate, with many complex and not yet fully understood risks. Some countries are beginning to question the wisdom of transforming central banks into retail banking institutions, not to mention the specter of central banks becoming an economic watchdog. This was clear in the UK’s parliamentary inquiry into CBDCs, which saw the idea of ​​a CBDC as “a solution in search of a problem”. Others seem to progress rapidly.

Responsible digital currency innovations are unlikely to destabilize their underlying currency of reference or erode monetary sovereignty.

Meanwhile, major economies are beginning to turn away from the idea that the private sector has no role to play in responsible digital currency innovation. On the contrary, some of the largest and most sophisticated economies in the world, from the United States to the state of California (the fifth largest economy in the world), to the United Kingdom (where Queen Elizabeth II mentioned digital assets in a recent speech), in Singapore, are taking whole-of-government approaches to Web3 economic competitiveness.

In a world where global financial needs don’t take holidays, as traditional analog financial services have reached a point of diminishing returns, the adoption of device-centric financial services should be a natural priority – even if these innovations cross borders. and traditional boundaries. Indeed, the lack of widely available open technology-based services (digital public goods) has proven to be a major pre-pandemic vulnerability amounting to nothing less than a Great Correction.

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Scenarios

Like the original space race, the ongoing digital currency race is not a zero-sum game where one country wins at the expense of another. On the contrary, the whole world can benefit from more inclusive forms of device-centric money, payments and financial services. By this measure, the United States is currently ahead and the dollar is rapidly becoming the currency that drives responsible, rules-based innovation in the open market. After all, money, whether physical or digital, relies on market confidence in its underlying institutions.

Another likely scenario following the standardization and harmonization of digital currency is not that it replaces traditional banking and currency, but rather accelerates innovation in this sector. In particular, privacy protection could be improved by preserving digital and decentralized identity standards, as well as an open-source technology roadmap for a true HTTP standard (Hypertext Transfer Protocols are the set of rules allowing file transfers over the Internet) for the movement of money over the Internet. None of these standards would compete with traditional systems.

Responsible digital currency innovations are unlikely to destabilize their underlying currency of reference or erode monetary sovereignty. On the contrary, the sum of these innovations would complete a great deal of unfinished business in the global economy, potentially reaching the billions of people who currently cannot access the formal banking system – which is in itself a source of instability and risk. deep global.

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