Will Central Banks Disrupt The Banking System With Gov Coins?

The big picture

• The latest editorial from the Economist landed with a bang.
• The tenured magazine thesis is simple.
• If Central Banks start to issue government coins using blockchains they may deeply disrupt the banking system as we know it.
• The Economist describes a world where citizens could have a direct account with their country central bank.
• According to the Economist, here is how that would work:
• “The idea behind them is simple. Instead of holding an account with a retail bank, you would do so directly with a central bank through an interface resembling apps such as Alipay or Venmo. Rather than writing cheques or paying online with a card, you could use the central bank’s cheap plumbing. And your money would be guaranteed by the full faith of the state, not a fallible bank. Want to buy a pizza or help a broke sibling? No need to deal with Citigroup’s call centre or pay Mastercard’s fees: the Bank of England and the Fed are at your service.”
• This account could be connected to other apps and use for direct payments
• The move could disrupt the banking ecosystem

Be smart

• A number of central banks have started research and studies on the possibility to issue digital currencies
• The Chinese have started. According to CNBC:
  In the last year, the People’s Bank of China has distributed several million dollars’ worth of a digital yuan through an app that is connected with the six major, state-owned banks.
• MYbank, an online-only bank in which Ant has a 30% stake, is now allowing some users to link their accounts with China’s digital currency app, state-backed China Securities Journal said Monday
• The Europeans are working on it. According to the European Central Bank: We have not yet decided whether to issue a digital euro. We are currently in a preparation phase: we are developing the concept, conducting practical experimentation, listening to the views of the broader public and engaging with stakeholders. The report is worth a read.
• Extract: “For instance, a digital euro could be issued to facilitate the development by supervised intermediaries of a full range of pan-European end-user solutions accessible to consumers. These end-users solutions could be used for the distribution of both commercial money and central bank money. In such a scenario, the issuance of a digital euro would help to preserve European autonomy in such a strategic sector as retail payments; it could then represent a building block for a European solution for point-of-sale and online payments.
• In the US, an official prototype is in the works and should be ready by July. .
• From the NYT: The Federal Reserve Bank of Boston has begun developing experimental digital currency code along with the Massachusetts Institute of Technology, and the Federal Reserve Board is researching the technology and its financial stability implications. The Fed has engaged with international bodies like the Bank for International Settlements in setting out principles for digital currency design.
• The blockchain will need to suit the specific needs of the United States
• Tens of thousands if not more of transactions per second
• The US Central Bank has published its preconditions to the creation of a CBDC
• Gather broad stakeholders support: government bodies, end users, financial institutions, technology and infrastructure providers, academia, and standards development organizations.
• Build a strong legal framework
• Ensure practical and effective measures anti money laundering, and terrorism financing
• Protect citizens privacy
• Nail the tech

• Accenture and the Digital Dollar Project are working on initiatives to support the effort.
• In the UK, The Bank of England and HM Treasury have created a Central Bank Digital Currency (CBDC) Taskforce to coordinate the exploration of a potential UK CBDC.

Why it matters

• This is the biggest change in the monetary system that we will live in our lifetime.
• The ability to manipulate currencies without a bank account at a legacy bank will be a definitive game changer
• Central Banks are challenged by the rise of privately owned blockchains and crypto currencies
• Countries are not comfortable legislating to outright ban crypto currencies
• Coins proliferate with little supervision, things like Dogecoins happen

Yes but

• Banks are scared: Industry associations will pressure governments to be included in any major decisions and will probably heavily water down the first attempts.

• According to the NYT: “Banks are not keen on the idea of a central bank digital currency. Their lobbyists say the technology would disrupt their business models without offering benefits that the current payment system can’t achieve.”
• Skeptics point to various challenges:
• Cybersecurity: A cyberattack on the CBDC infrastructure could have grave consequences
• Run on the bank: Clear limits and standards should be in place to prevent massive money movements in case of financial crisis
• Banks loans: Banks would not be able to lend money backed by Digital currencies, interest rates would go up, available liquidity would go down
• User experience: Astate mobile wallet would need to be user friendly and accessible to all in particular the unbanked through mobile and desktop
• Infrastructure and technology: The choice of the blockchain on which the state coin would be built will become a standard for interoperability with fintech and banks
• Cross border transactions: Would state coins can be used to pay abroad? Where would they be accepted
• Privacy and government control: With direct access to consumer data, would states be able to levy fines and taxes from citizens accounts? Can citizens be punished by being kept out of the system in case of crimes? Will citizens’ accounts be prohibited to buy certain assets or invest in certain countries?
• Carbon footprint: We are already discussing the Co2 emissions for Bitcoins, imagine the volume of servers necessary to run a blockchain capable of sustaining the US or the EU economy.

Pop the bubble

• The amount of talk on the subject is just growing
• The Google trend is pretty clear. This is the chart for the Central Bank Digital Currency Topic

The catch

• Believe it or not, we may all one day have a digital wallet directly link to our central bank
• This is going to happen, slowly but surely
• Experiences will probably be very different from a country to another

What’s next

Expect things to move quickly in Asia

• China is ready, and its gov coin will be issued in the next 2 years
• It’s great for China, it limits the power of the Ant and Alipay of the world
• It fits well with their centralized view, citizen control, financial control, cross border transactions control
• It positions the government as a technology and innovation actor driving change in the Financial Services industry and not just a laggard regulator

Expect things to move slowly in Europe and the US

• European have a special set of problems with a multi country currency and a byzantine governance
• The US governance is heavily influenced by the revolving doors of careers intertwined between regulation and private sector
• Both continents are facing massive populist political movements fueled by conspiracy theories
• Inspiring confidence in a tech based centralized currency can be a challenge in an environment where trust in government institutions is eroding

By the numbers

Source Accenture

What people say

• “Rushing anything of this potential magnitude could introduce unintended consequences that threaten the stability of the banking system without contributing meaningfully to economic inclusion,” said Steve Kenneally, senior vice president of payments at the ABA, per Bloomberg.
• “Everyone is afraid that you could disrupt all the incumbent players with a whole new form of payment,” said Michael Del Grosso, an analyst for Compass Point Research & Trading, per Bloomberg.
• “The fire has been lit,” said Josh Lipsky, who has helped convene government officials from the U.S. and other countries working on digital currencies as director of the GeoEconomics Center at the Atlantic Council. “The world is moving very quickly on these projects.per Bloomberg”
• Neha Narula: It took a while before the internet was ready for prime time. Blockchain is also not ready for prime time and needs a lot more work. And that work needs to happen without pressure from the established financial industry to conform to its own narrow goals per Wired.

What I think

• This is a tough sell for Banks
• The fed is testing a future central Bank Digital Currency and the regulator has still not established clear guidelines on how to treat the existing digital currencies
• Every credit union, regional bank, and others should have a digital currency strategy.If not a plan at least a point of view
• Blockchain is in its infancy, there are myriad of potential models, roads, ledger types, technologies that can be used
• Every country will need to build a national standard, portability and interoperability is going to be interesting
• Questions:
• Have you ever had a great digital experience on a government app or website?
• Have you ever had a great digital experience on a Bank incumbent app or website?
• Fintech start ups exist for a reason. Because incumbents are slow, too big to move fast, and have few incentives to change
• They are profitable as is and have built their business model with a very limited “obsession with customer satisfaction” . Which makes sense.
• For governments and major financial institutions to create a tool, or experience that would mirror the ones we have on Paypal or Venmo, will take incredible odds
• Expect short and fruitful Congress hearings, anticipate deep and constructive bipartisan compromise and deal making
• In short: This is exciting stuff, probably one of the major shift in our daily lives and in the history of mankind