The financial world is rapidly getting rebuilt using blockchain. China is ahead of its geopolitical rivals, having already adopted the digital yuan; and both businesses and private investors are putting billions in crypto and DeFi with zero central bank regulations. In these conditions, the Fed and the ECB are forced to accelerate.
I confess that after the recent articles about central bank digital currencies of the US and the EU, I was planning to stay away from this topic for a while. But it seems that “standing on the sidelines” is not an option. Everything is happening increasingly fast and we just might very soon see the CBDC of the world’s largest economies.
Usually, before making fundamental decisions, the United States authorities do a kind of “preliminary strike” to condition the public opinion with write-ups from third-rate officials familiar with the issue. This time the harbinger of change came in the form of an article written for Yahoo! Finance by Sheila Bair, a former assistant to the US Treasury Secretary and former chairman of the Federal Deposit Insurance Corporation, currently a member of Paxos board of directors. In it, she explains the basic functioning of the United States CBDC – the “digital dollars” already being created by the Federal Reserve.
Here’s the interesting part: Sheila Bair didn’t focus at all on the technical aspects of the issue (blockchain, protocols), rather on its social role in the distribution of government subsidies to the population.
“The Fed has no control over where the money goes or to whom financial institutions decide to lend, and it is clear that the main beneficiaries of the second round of stimulus were investors and the ultra-rich, – she writes. – Fortunately, a new technology – CBDC – provides the Fed with a mechanism to distribute cash straight to working families. This would be a profound shift in the way the Fed has traditionally responded to economic crises. Now it will be possible to bypass the financial system and direct the increase in the money supply to those people who need it the most.”
This is something profoundly new: a senior finance official talks about the need for public money to bypass the financial system!
But Sheila Bair’s reasoning is quite sound – from the state’s point of view, of course. She explains that payments will be limited to households, which will indirectly benefit small and medium-sized local businesses, as it will provide families in need with income to pay rent, buy food, and other basic goods and services. Using blockchain, the Fed can identify each recipient of digital dollars and track them to ensure the right person got the money, closely monitoring the entire process and preventing potential fraud.
The creation of CBDC – “digital dollars” – is also due to the fact that the Fed is no longer going to try and stimulate the economy by lowering interest rates. When people lose their jobs and income, they don’t need more debt, they need money to live on.
“Direct cash aid to the population could help our economy move away from using debt (budget) to support growth and hopefully put an end to the economic distortions caused by years and years of ultra-low interest rates, perhaps finally normalizing them”, – Bair says in the article.
Simply put, the Federal Reserve and the US Treasury are coming to reject the idea of giving money to the banks, hoping that they will stimulate the economy. Sheila Bair claims in her post that this way money ends up going to the stock market and the super-rich, bypassing consumers and businesses. Instead, money should be given to people, who will then stimulate the economy.
This will obviously have a direct impact on the cryptocurrency market.
“An argument used both in favor of and against CBDC is that it will undermine private stablecoins, – writes Sheila Bair, herself a top manager of Paxos directly involved in this area. – Some fear that privately-sponsored stablecoins may eventually crowd out central bank digital currencies. So they are supporting CBDC as a way to supplant those private initiatives. For the same reason, proponents of private stablecoins oppose CBDC introduction in the US.”
In any case, it is underway. On July 14, the two largest central banks in the world, the US Federal Reserve and the European Central Bank (ECB), simultaneously declared their commitment to the idea of switching to the digital dollar and the digital euro, respectively.
Thus, the head of the Fed, Jerome H. Powell, promised to soon share with the public his principled position on the digital dollar. The official position of the Federal Reserve will take the familiar to the crypto community form of a “white paper” in the fall. “We expect the report to be published around the beginning of September, give or take, – Powell said to the US House of Representatives at a financial services hearing. – We are working hard on it right now. The document will describe and assess digital payments, including stablecoins and cryptoassets. All of them are critically underregulated, or rather, they are not regulated by the Federal Reserve at all.”
Notably, Powell also expressed concern over the popularity of dollar-pegged stablecoins: “You wouldn’t need stablecoins, or indeed cryptocurrencies, if you had an American digital currency – I think this is one of the strongest arguments in its favor.” The Fed chair admitted, however, that there is still a lot of work to be done in this direction – both technical and legislative.
A similar statement was made by the ECB on the very same day, July 14. Fabio Panetta, a member of the European Central Bank executive board, wrote in his blog that the Central Bank was conducting “a study examining key issues regarding the development and distribution of the digital euro and its potential impact on the market”. The final decision on whether to issue the digital euro is left for a later date: “Given the ongoing digital transformation that has the potential to reshape the payments landscape or even the entire financial system, central banks must be bold and keep up with the pace of change.”
If you get to the core statement behind all the European bureaucratic pablum, what was said is: “We have already decided to do a European CBDC, and are now preparing to make it official.”
The digital euro is not supposed to replace cash, instead, they both will be in circulation simultaneously. Europeans will be able to use electronic money issued by the ECB or national central banks to pay for goods or services, which will require having a digital euro wallet.
At this point, experts agree that the “digital euro” should be expected by about 2026. Earlier, the President of the ECB and ex-head of the IMF Christine Lagarde spoke on the same topic. She believes that there is no need to rush. According to her, the task of the ECB is to “provide access of citizens and businesses in the digital age to the safest form of money – central bank currency”.
Europeans have a more complex and lengthy decision-making process than the United States or China. In addition, the ECB leadership clearly intends to first see how successful will the digitalization of the dollar be. In China, however, the digital yuan is already in circulation in some regions, so Beijing is undoubtedly ahead of the EU in this race. This means Europe could well speed up the introduction of the CBDC so as not to lessen the global role of the euro.