The future of money is digital, but is it Bitcoin?

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Of course, governments will borrow some pieces of the distributed ledger technology behind private cryptocurrencies, but they will really want to retain control over what flows as money through their economies. Some will succeed.

Don’t be surprised if at the end of the current decade your smartphone wallet looks like a multi-currency account. But instead of dealing with commercial banks, you can be a customer of central banks. Several of them, in fact.

Does that sound far-fetched? Other than the Bahamian Sand Dollar, there is no official online currency in mass circulation yet. Still, the digital yuan pilots are picking up steam as Beijing targets a possible deployment coinciding with the 2022 Winter Olympics. Sweden may be the next great nation to follow suit. The Bank of Japan does not have immediate plans, but recognizes the possibility of “increased public demand” for official digital money in the future.

Even in the United States, which is just playing around with the concept, digital payment vehicles that don’t rely on traditional bank accounts can increase financial inclusion for cash users, according to a September 2020 article by the president of the Federal Reserve Bank of Atlanta, Raphael Bostic, and others. . According to Treasury Secretary Janet Yellen, a digital dollar “is absolutely worth considering.”

Once China and the United States are both in the fray, virtual money is bound to become a tool for exerting global influence by slicing the world into new blocks of money. Indeed, any token will have a double use outside the borders of the issuing country. The dollar or yuan that appears in a phone wallet in Indonesia or India – backed by a solemn pledge from U.S. or Chinese taxpayers – could be used to purchase goods, services, or assets internationally.

Just as easily, this new money can end up replacing the national currency in people’s daily lives. While this is no different from the traditional dollarization that occurs in countries plagued by inflation and exchange rate volatility, the convenience and accessibility of digital cash issued by the central bank could allow “a substitution. at a faster pace and on a larger scale, ”according to Tao Zhang, a deputy managing director of the International Monetary Fund.

To maintain control of monetary policy, the authorities of small economies will need their tokens to be attractive in national situations. The goal for larger nations may be different: China and the United States may want to offer add-ons that make e-CNY or FedCoin the preferred choice of foreigners in settling international claims.

An efficient future will be one in which all central bank digital currencies are interoperable. In other words, they will interact with each other – and with private sector alternatives, including Bitcoin, explains Sky Guo, CEO of Cypherium. The U.S. enterprise blockchain startup is a member of the Fed’s Faster Payments Council and the Digital Monetary Institute of the Official Monetary and Financial Institutions Forum, or OMFIF, a central bank think tank. goes digital: how to process high volumes of transactions quickly, inexpensively and with a strong consensus among automatically updated registers on a network? How do you give people a sense of privacy in daily payments, even after losing the anonymity of money?

Central banks will have to make choices. Not all smartphones can run advanced virtual machines, effortlessly executing software code for automated contracts. Pick the wrong technology and the unbanked population could be left out again. Ditto for overseas remittances, a $ 124 trillion per year opportunity for tokens to replace an expensive network of correspondent banks transferring money by exchanging SWIFT messages. But it won’t work for small transfers if the computing power to verify transactions in a decentralized network is too expensive.

The ideal technology doesn’t have to be a blockchain, but it should be something “lightweight, flexible, and able to work with legacy systems,” Guo says. Above all, the distributed ledger must be transparent.

There will be other obstacles. “A driving force to lobby against central bank digital currencies has been established among payment processing giants like PayPal, Venmo and Stripe,” Guo tells me. “FedCoin won’t need these middlemen to send funds. As these companies are victims of innovation, it will be interesting to see how they try to protect themselves from disruption. ”

One way to resolve the tension may be to co-opt the private sector. As IMF economists Tobias Adrian and Tommaso Mancini-Griffoli have argued, an official virtual currency could be like Apple’s iOS operating system, with commercial banks and e-money providers running additional apps. . The Apple Health app may be suitable for a non-business user; an athlete will want something more sophisticated. Money could follow the same path.

Countries will also need to cooperate with each other. Take the m-CBDC bridge. The 24/7 cross-border remittance project using central bank digital currencies was started by the Hong Kong Monetary Authority and the Bank of Thailand, but has now been joined by the Central Bank of Thailand. United Arab Emirates and the People’s Bank of China.

Many central banks in emerging markets might think that in order to retain control over their country’s money, they need to chain people with a single virtual token – the one they issued. But it may simply encourage a massive migration to private cryptocurrencies which are legal tender and, therefore, less volatile. Diem, as the Libra project formerly backed by Facebook Inc. is now known, could be one of those stablecoins.

Sovereign currency issuers will need to see themselves less as lords and masters and more as service providers in a free market for digital money. After all, they’re going to push their products into crowded wallets and hope we like them more than a competing offer from another central bank. Those who lose the plot risk losing the loyalty of their citizens.

Andy Mukherjee is a Bloomberg opinion columnist covering industrial companies and financial services. He was previously a columnist for Reuters Breakingviews. He has also worked for The Straits Times, ET NOW and Bloomberg News.

This story was posted from an agency feed with no text editing. Only the title has been changed.

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