Voice of the Industry

Does China's Digital Currency have a chance to supplant a digital dollar as a global reserve currency?

Wednesday 5 August 2020 08:32 CET | Editor: Mirela Ciobanu | Voice of the industry

The principal threat to the role of the dollar as Prime currency comes not from Facebook but from China’ ‘The Digital Currency Revolution’ by David Birch

As we continue our series dedicated to the topic of Central Bank Digital Currency, today we sit with David Birch, author, advisor, and commentator on digital financial services, to learn what are some of the economic, social, and political repercussions of CBDCs.

If you are interested to learn more about Central Bank Digital Currencies in general, read Central Bank Digital Currencies for dummies – a quick guide into CBDCs from the Dutch Central Bank, an educational piece written by Harro Boven, Policy Advisor at the Dutch Central Bank.

Digital currency is undergoing a rapid ascent to the top of financial organisations’ strategy concerns and digital currency projects are springing up in central banks around the world. It is rapidly moving from Powerpoint to production. There are obviously a number of different ways that a digital currency could be implemented but in general, central banks prefer to control the creation of the digital currency, but have it distributed by the commercial banks through their existing channels. This is what is known as the ‘two tier’ implementation of digital currency. This is how it was done for the world’s first CBDC Mondex, a generation ago. In the UK we wouldn’t use smart cards for it today, though, you would implement it using mobile phones, a kind of BritDex.

A cheaper alternative is to have the central bank create accounts for all citizens, businesses, and other organisations. You could imagine something like M-Pesa but on population scale, BritPesa if you like. This will be cheaper because it will be completely centralised and the marginal cost of transferring value from the control of one person or organisation to another through such a system would be absolutely negligible. Central banks do not really want to implement this kind of ‘one tier’ solution, however, because it would mean having to manage millions of accounts and they would prefer somebody else to do this and deal with everything else that goes with interacting with the general public. The commercial banks and plenty of other non-bank players (think Alipay in China for example) already have the apps, the infrastructure, and the innovative approach that would not only bring the digital currency to the mass market but would also open up the potential for the digital currency as a platform for innovation and development.

Alternatively, there could be something like USDC, a digital asset backed by central bank reserves. This BritCoin would still be a two-tier solutions distributed to the public by the commercial banks but it would remain under the control of the central bank. I think this is by far the most interesting of these three practical CBDC options because it would create a new infrastructure, a platform for real innovation. Whether you call them ‘smart’ ‘contracts’ or not (I don’t), persistent scripts executing on a generalised digital asset platform would lead to real innovation.

We need this innovation soon. The noted historian Niall Ferguson stated plainly in The Sunday Times that ‘if America is smart, it will wake up and start competing for dominance in digital payments’. What he means is that if Chinese digital currency becomes widely used by a couple of billion people, starting with the those along the ‘belt and road’ trading corridors, they may well find it more than a little convenient to order goods from a Chinese partner via WeChat and settle via Alipay. And if they can settle instantly with their Chinese digital currency (or, to be fair, Libra or something similar) then they will soon find themselves accepting the same in payment. In this case, we could see a new kind of Cold War as digital currency blocs battle for control of the international money and financial system, with Facebook’s Novi facing off against Alipay on the one hand but, more importantly, the digital Yuan facing off against the digital Dollar.

This is a competition that is about more than hash rates and APIs. Whether you agree with it or not, that fact that global trade is largely in dollars means that America is able to exercise soft power through the international monetary and financial system. If other digital currencies begin to provide alternatives, then that has political ramifications that are considerably greater than they may seem at first. We (the UK, Europe, the USA) need an integrated strategy for digital currency, and we need it now.

Watch out for our next instalment of Central Bank Digital Currency series, that presents Facebook’s Libra and discusses Libra’s potential to develop an open identity standard (again from David Birch).

About David Birch

David Birch is an author, advisor, and commentator on digital financial services. An internationally recognised thought leader in digital identity and digital money; he was named in the top 15 favourite sources of business information by Wired magazine and awarded ‘Contributor of the Year’ by the Emerging Payments Association. Currently he is Director at Consult Hyperion and Advisor to the Board at AU10TIX.

 

About Consult Hyperion

Consult Hyperion is an independent consultancy. We hold a key position at the forefront of innovation and the future of transactions technology, identity, and payments. We are globally recognised as thought leaders and experts in the areas of mobile, identity, contactless and NFC payments, EMV, and ticketing.


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Keywords: David Birch, digital currency, central bank digital currency, Facebook, China, trade, economy, central bank reserves, central bank, payments, innovation
Categories: Blockchain & Cryptocurrencies | Cryptocurrencies
Countries: World
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Blockchain & Cryptocurrencies