THE DIGITAL CURRENCY CHALLENGE IS REAL
It has been correctly observed that a crisis on the scale of the Covid-19 pandemic inevitably results in rapid and far reaching changes to economic and social paradigms, though many of the associated changes or shifts are often an acceleration of trends that pre- existed the crisis.
Cryptocurrencies, above all Bitcoin, are now well established and have performed exceptionally well in recent months. Even if they are viewed by many investors as highly speculative and difficult to trade, volatile (as seen recently) and poorly regulated, unsecure and also tarnished by association with criminal activities, ranging from tax evasion and money laundering to narcotics and terrorism. For many enthusiasts they are akin to ‘digital gold’, and in a world swamped with central banks’ ‘fiat currencies’, above all this year, Bitcoin’s finite supply is a major attraction as a ‘store of value’, even if many would dispute the latter.
The cryptocurrency universe would probably still be seen as an exotic and esoteric corner of financial markets, had it not been for Facebook’s Libra project, which raised the hackles of politicians and monetary policymakers almost instantaneously when proposed in June 2019, above all due to its potential systemic threats. A heavily scaled back dollar backed ‘Stablecoin’ version is now due for launch in January 2021. However, cryptocurrencies are in some ways a relatively peripheral threat to the global financial system, particularly the established banking system, and above all relative to the broad array of ‘fintech’ facilitated payment systems, (personal, retail or commercial), which are integral to any discussion of digital currencies.
There is a degree of irony that the threat of disintermediation of the banking sector, due to such payment systems, is one of the risks also posed by Central Bank Digital Currencies (CBDC), as the BIS highlights in its report on “CBDC: foundational
‘FINTECH FACILITATED PAYMENTS’ SYSTEMS ARE A NATURAL PROGRESSION AND ADAPTATION OF PRE-INTERNET ‘TELEGRAM’ FACILITATED SYSTEMS OF TRANSFERRING MONEY, SUCH AS WESTERN UNION, THOUGH WITH A MUCH BROADER SCOPE OF APPLICATION.
principles and core features”
https://www.bis.org/publ/othp33.pdf . As the BIS notes, the common principles and key features of a CBDC need to “emphasise that: (i) a central bank should not compromise monetary or financial stability by issuing a CBDC; (ii) a CBDC would need to coexist with and complement existing forms of money; and (iii) a CBDC should promote innovation and efficiency. The possible adverse impact of a CBDC on bank funding and financial intermediation, including the potential for destabilising runs into central bank money, has been a concern of central banks.” Obviously, there is one important distinction to make between CBDC and cryptocurrencies, namely that the primary objective of a cryptocurrency is to have a payment system operating outside the jurisdiction of sovereign powers, while the objective of CBDC is to be able to exercise far greater control over the supply of money, i.e. the two are diametrically opposed.
‘Fintech facilitated payments’ systems are a natural
progression and adaptation of pre-internet ‘telegram’ facilitated systems of transferring money, such as Western Union, though with a much broader scope of application. But there are other significant aspects in their development, beyond the convenience attractions of utilizing a mobile device for making payments rather than cash and physical cards, or the power of the technology that underpins that. In the developed world, it is fair to say that established banks have spent decades lagging behind in adopting new technology, and above all in upgrading and speeding up payment systems, in part due to cost, though also more opportunistically due to their ability to arbitrage the rather slow and ponderous payment processes, and to generate strong revenue flows from charges for payments, given their effective monopoly on them, while justifying high charges because of settlement failure risks. Regulation and technology have put paid to much of the latter, as have changing consumer and business demands, and the attractions for ‘big tech’ companies to capture part of the mass payments systems are all too obvious, both in terms of data and turnover terms.
12 | ADMISI - The Ghost In The Machine | Q4 Edition
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