The first known examples of paper money were developed in
China over 1000 years ago. And today China is disrupting money
again by being the first major economy to develop and deploy
its own digital currency. And the world seems ready for it, as
services like Venmo, Apple Pay, and cryptocurrencies, like
Bitcoin have prepped us for virtual transactions. But the
digital yuan is different. It doesn't rely on physical money.
It's just computer code.
The digital you want has rolled up quite fast. In some cases,
like in Shanghai, for example, there's a shopping mall and
there are a couple of locations like a shopping mall or the
subway where the digital yuan will be used.
It's called a central bank digital currency, or CBDC, and
China is not alone in its ambitions to digitize money.
Over 80% of the world's central banks are now exploring this and
very few have made the decision to go ahead.
A CBDC is almost an amalgamation of a cryptocurrency and a
standard currency. It's all digital, but it is created and
controlled by a government and/or a central bank.
CBDC is fundamentally pretty simple. It's another form of
money, like the money we have today. But there still is a lot
to figure out about exactly how it should work. First of all,
we're not exactly sure how it's going to be distributed, how
people will hold it, whether it will require them to have a bank
account, for example. And we're still figuring out things like
how we can make a CBDC work offline, and how we can protect
people's privacy to make sure that we aren't keeping a record
of everyone's transaction somewhere.
The US dollar remains the world's de facto monetary
reserve. But with so many countries like China going full
speed ahead to develop CBDCs for themselves, the US dollar faces
a challenge: either follow the trend, find a better solution,
or risk losing its place in the world economy.
This is the single most important move on the global
chessboard in the last 20 years is how the United States and its
allies, interfaces or doesn't interface with the Chinese
central bank digital currency.
Today, when you want to send money to someone, it's actually
pretty clunky. You've got Venmo cash app and Zell which are all
improvements over the days of wire transfers. But there are
limits to what you can send and it can still take days to
process. Enter Bitcoin. Bitcoin was built on and originated
blockchain technology, which speeds up this whole process.
Without going too deep into it, Bitcoin and other
cryptocurrencies transfer money using a decentralized
distributed ledger. There is no central company, government or
entity controlling these transactions. To keep things
accurate and secure. The system compares all of the ledgers to
make sure that it stays up to date and contains the same
information.
A central bank digital currency is governed, there's an
organization that can mint more of it or take it away, that's
usually represented by the government of a country. So
that's in contrast to cryptocurrencies which do not
represent nation state fiat currencies.
A CBDC would offer some similarities of both a
cryptocurrency and a traditional currency. It'd be digital and
could even be built using blockchain technology, but it
would be centralized and controlled by the government and
banks.
The idea with CBDC is that it might be the case that you can
make payments without going through a financial institution
just the way you do so with cash today.
So what would be giving this digital dollar any value? Well,
what gives a physical dollar any value, among other things, it's
trust.
If people trust money they'll use it. It doesn't really matter
if it has a physical backing, it's still worth $1 because you
can turn it in for $1 worth of something else, and everybody
accepts it.
Right now, 67 countries are researching, developing or have
a pilot program for a CBDC. Among them are China and the US.
So there have been these experiments. And they're, I
mean, relatively small scale for China has its 1.2 million people
– sounds like a lot, but in the Chinese context, not really.
China launched its digital yuan in parts of the country and it's
incentivizing people to use it.
You sign up with your bank, and the bank will then give you a
digital wallet and in that digital wallet, you'll have this
red packet of money and then you could spend it either online for
example, like a JD store, or you can go to these shopping malls
or other locations depending on where you are in the country.
But the US is taking a smart-over-speed approach.
The chairman of the Federal Reserve, Powell, said we'd much
rather get it right then to be first.
Some people are speculating that the US dollar could lose its
supremacy in the world economy because of China and the digital
Yuan.
I believe the digital one is the largest threat to the west that
we faced in thelast 30, 40 years.
Currently 62% of the world's currency reserves are held in US
dollars.
What that means is that if people are trading, for example,
between, you know, the Japanese yen and the Indian rupee, it
might be the case more often than not that they actually do
that deal in dollars.
But Goldman Sachs predicts that the digital Yuan could have 1
billion users by 2030. That's triple the entire population of
the United States.
So it certainly might be the case that if there's a digital
currency and another currency, not the dollar, and people
really like using it, they might start using that currency more,
and they might decide to keep some of their holdings in that
currency. But that's just one pillar on what makes the dollar
the world's reserve currency. So there's, there's still a lot of
other factors in that.
But it's still not really known whether a CBDC is the right
thing for the United States. So let's take a look at some pros
and cons.
We'll start with some of the benefits that a cbdc could offer
the United States; sustainability, speed,
convenience, and access. Concerns over Bitcoin and its
power consumption have put cryptocurrencies, even the ones
with less power requirements, in a bad light.
The reason that Bitcoin uses so much energy is because it is
trying to operate in a very specific kind of environment
where there's no one in charge. A central bank, digital currency
does not need to operate in that exact environment. There is an
organization in charge; the central bank.
And it's fast. Other countries who have tested cbdcs have seen
real time payments, which means you send the money and it is
instantly someone else's. And that includes sending money to
people in other countries.
Remittances are money that's sent from one country to another
country, and usually involves an exchange of currency as well.
And traditionally, these have been extremely expensive.
Say you want to send $100 to someone in the Philippines via
Western Union, a popular international money transferring
company. You pay a fee as high as $7.50, and the cash would be
converted at a lower rate, meaning that person would get
less than what you sent after conversion. It can also take up
to four business days to get there. With a CBDC these
transactions would be instant, and possibly fee free.
There will be tests in a CBDC Bridge project involving Hong
Kong, Thailand, China and the United Arab Emirates. They're
building a bridge that would allow these cross border
payments to occur through CBDCs in a very slick way.
Another benefit could come to the 7.1 million Americans who
don't have a bank account. 13.8% of black households were
unbanked and 12.2% of Hispanic households were unbanked in
2019, while white households were only 2.5% unbanked. The
most cited reason for not having a bank account was not having
enough money to meet the minimum balance required.
And that has repercussions. It means that it might be harder
for them to make payments, it might be more expensive for them
to get loans. And it's certainly the case that people are looking
at central bank digital currency as potentially a mechanism to
help with financial inclusion. Now, whether or not that's
actually going to work remains to be seen.
Then there are the concerns to consider. We have trust,
privacy, innovation, and again access.
The second most cited reason for 7.1 million Americans not having
bank accounts comes down to trust. More than a third of
those unbanked Americans don't trust banks. For the folks
developing a CBDC in the United States, that's a key driver
behind the project.
A different type of architecture that didn't sort of charge these
appearingly random fees would certainly be more compelling to
people and would help to establish deeper trust.
Americans are distrustful of centralizing their data, and
it's ironic that they are in many cases happy to give their
data to the phone company or to the bank or to Google but they
wouldn't be happy to give it to a central bank or government
agency that's there to protect their data. Other countries
don't seem to have as much concern about that.
It sounds kind of surprising, I think, from a Western
perspective, or from a US perspective, that people here
would feel more comfortable with the government managing their
money or have being responsible for the digital yuan as opposed
to having their money in a private entity such as WeChat or
Alibaba. A lot of people are much more comfortable and also
just used to the idea that the government is tracking what
they're doing.
If there is a digital dollar, privacy is going to be a very,
very important part of that. First step is to be very careful
about what data is collected in the first place. The second is
to think very carefully about rules and laws and regulations
around that data that is collected. The third step is to
investigate cryptographic tools that can help us store data in
an encrypted way, while still making that data useful to
people in aggregate.
CBDCs could also pose a threat to the $1.3 trillion
cryptocurrency market. While the whole lot of people in the world
today see cryptocurrencies as an investment, the real goal of
cryptocurrencies like Bitcoin, at least, were to be spent
easily and internationally. And that might not be necessary
anymore if we have CBDCs.
Our opinion is that CBDCs and cryptocurrencies are going to
coexist, and they're probably going to reinforce and help each
other. This is all about the upgrade of money, and it's
happening in multiple different ways. So people who are
interested in buying holding and using cryptocurrency, a good
number of them do so because it's not a central bank backed
currency.
And a CBDC in the US has potential to stifle FinTech
innovation. Right now, there are a lot of things happening in the
world of digital currencies and financial technology.
I don't think the US should build its own digital currency,
if it stifles innovation, like Diem or like certain kinds of
FinTech firms. It needs to leave space for innovation for
entrepreneurship and not say, you know, we are the solution
for everything.
And while a cbdc could help those Americans without a bank
account, it could also expand the technology gap. 7% of
Americans say they don't use the internet. For black Americans
that rises to 9%, and for folks over 65, that rises to 25%. Only
85% of Americans say they have a smartphone. That's even less 83%
for black Americans. And Americans with a disability are
three times as likely as those without a disability to say they
never go online. So switching our financial system to an
entirely digital one could have some negative impacts for
already underserved communities.
A central bank digital currency would likely have the effect of
reducing the use of paper money, and the unbanked, of course, are
relying heavily on paper money. If you make paper money so
unpopular that it starts to be difficult to spend, then that
could actually harm the situation of some unbanked
people unless you have a solution that reaches well into
that 7.1 million household group of people that are currently
unbanked.
A system where we don't use physical money anymore is not
hard to imagine, and might be in our near future. But the route
we take to get to that future is likely to look very different
from China.
There are some estimates that China could be completely
digitized within the next five years. So that is really quick.
Most of the work that we're doing assumes that CBDC will
coexist with physical cash, and that users will still be able to
use physical cash if they want to. Now, the fact of the matter
is that a lot of the world is moving into the digital realm,
and it's probably the case that the use of physical cash is
going to decline in the future if more and more moves online.
A CBDC does not get a unanimous vote of confidence in the United
States. There are other options. Stablecoins, for instance, like
Tether, USDC, and the upcoming Diem are cryptocurrencies linked
to the price of $1.
In general, the US payment system is behind – whether you
use a new central bank digital currency, whether you use a
private stablecoin, whether you allow FinTech firms to play a
bigger role. So there are different approaches. And the
United States is going to, I hope, going to develop a clear
strategy for improving its payment system because that just
adds to the strength of the US economy and it helps individual
people in the US. It all comes down to helping people.
Regardless of the solution, the US will have to keep up with an
increasingly digital world, especially when it comes to
money, where competition between China's digital yuan is heating
up.
China has certain reasons why they are probably launching a
digital currency. And it's not clear that China's reasons map
on to the United States, which is a very different environment.
So I think it makes a lot of sense to go slowly, to do very,
very thorough research and to try to find out exactly how this
technology might work and exactly what problems it might
help with.