Business Intelligence ENG Future of Money & Finance

Future of Money: The Battle over the Future of Money (CBDCs vs. Stablecoins)

Central banks have been stepping up efforts to create new electronic currencies in an attempt to counter the threat posed to their monetary power by private currencies such as Facebook’s Libra. However, CBDCs might prove to be too little too late to shape the future of money. When you can’t fight a trend, it’s better to embrace it.

If you lived in France or traveled to it in the 1980s you might remember the Minitel. This small electronic terminal looking very much like the first models of Amstrad Micro-computers released in the early 1980s. Yet, the Minitel was connected to a limited public network – an Internet before the arrival of the real Internet. At that time, it was indeed a brilliant idea. One of today’s established French billionaires, Xavier Niel, actually started his successful entrepreneurial career by selling services like classified adds on the Minitel.

In fact the Minitel was so successful that it is probably one of the reasons why France missed the first wave of the Internet, in the early 1990s. At that time, the country’s technocrats and entrepreneurs simply did not see the need for another Minitel, confusing the convenience of  a proprietary hardware with the peer-to-peer and software-as-a-service principles sustaining the world wide web. Of course, it did not help that the Minitel was operated at that time by the Country’s government-owned Telecom company, France Telecom, which enjoyed a monopoly over it. However, it did not last and anyone born in France after 2000 has never heard of the Minitel, except as an artefact displayed in a Museum. For his part, Xavier Niel founded Free, one of the first French ISP (Internet Service Provider).    

Contrary to the Minitel, the idea of CBDCs (Central Bank Digital Currencies) could be doomed even before being deployed. What is a CBDC? It is a hybrid between physical cash and an electronic payment service. It takes to another scale the concept of “digital wallet” that had been launched more than a decade ago. The Bank of International Settlements (BIS) stands behind a concerted efforts by Central Banks to remain relevant in a cashless world and increasingly in a world which could soon skip traditional financial intermediation altogether. An optimist tone is voiced in the chapter dedicated to CBDCs included in the BIS latest annual economic report published last month. According to the BIS, “CBDCs, if properly designed, have the potential to give rise to a new payment mechanism that is interoperable by default, fosters competition among private sector intermediaries, and sets high standards for safety and risk management.“.

Before the rise of cryptocurrencies, the only successful large scale electronic payments experiment has not been created in an advanced OECD country but in Subsaharan Africa. The success story of M-Pesa – Pesa meaning “money” in Swahili and “M” standing for mobile – is well known. It is now being taught in Management schools all around the world as an example of frugal innovation. Although it was launched by Kenya’s Telco Safaricom with the technical support of Vodafone, M-Pesa is a truly African success story, a David versus Goliath tale in the world of electronic payments. Indeed, not only did M-Pesa took by surprise the world’s established cash transfer services (Western Union, Moneygram) which used for decade to grab exuberant fees for their service from the world’s poorest and most disenfranchised people. M-Pesa actually created a whole ecosystem – a concept transposed from environmental sciences -, allowing it to build multiple layers of services on top of a very lean physical infrastructure, by making its solution incredibly easy to use, and by taking the best of both worlds from (mobile) telecommunications and (micro-)financial services.

A currency is more than a payment system, it has to fulfil three basic functions. It has to be a medium of exchange, a unit of account, and a store of value. The first generation cryptocurrencies like Bitcoin, Ethereum and Ripple can easily fulfil the two first functions. But the high volatility of these crypto-coins prices, when expressed in US dollars or in other major fiat currencies, has prevented them so far from becoming stores of value in their own right and fulfilling the third function that is expected from a genuine currency. There have also been many (cyber-)security and privacy issues which have risen public concerns over their future. In addition, there are problems in terms of interoperability between these different crypto-assets or cryptocurrencies (the jury is still out on their legal status). The announced public listing of Coinbase, one of the world’s major cryptocurrency exchanges might not entirely assuage those concerns but it is a step in the right direction. 

However, the real threat posed to fiat currencies and to their electronic avatars backed by Central Banks does not come from Bitcoin and its gemelli. Large tech giants like Facebook, Apple, Alphabet, Amazon, Tencent and Alibaba could become more challenging rivals for the Bank of England, the European Central Bank and the likes. These tech conglomerates have already billions of customers around the world. Apple and Ali Baba have already developed their own proprietary electronic payment system, respectively Apple Pay and Ali Pay. The latter claims through its dedicated financial payment subsidiary Ant Financial 1.3 billion annual active users as of March. The majority of its users came from China, while the rest were brought by its nine e-wallet partners in India, Thailand, South Korea, the Philippines, Bangladesh, Hong Kong, Malaysia, Indonesia, and Pakistan.

While Alibaba and Tencent are unlikely to challenge their domestic regulators, considering China’s top-down political and institutional system, the tech-libertarian spirit behind Facebook’s Libra project has been met with resistance from financial regulators and central banks all around the world, including the majority of Congress Members and most Board Members at the Federal Reserve. Libra would be a “stablecoin” backed by a basket of sovereign currencies such as the dollar, the euro and the yen. It would be made freely available to its customers – a stark departure from the fees earned by Central Banks every time they issue banknotes, or  “monetary seigniorage”. Although it continues to face regulatory and political hurdles, the Libra project has quietly moved forward from a technical and operational perspective. “The Swiss Financial Market Supervisory Authority FINMA has received an application from the Geneva-based Libra Association for a payment system licence. This marks the start of the licensing process under Swiss supervisory law,” FINMA said in a statement in April.

Libra has been endorsed by some public figures like Timothy G. Massad, a former chairman of the Commodity Futures Trading Commission and Former Assistant Treasury Secretary for Financial Stability. In a report published in June by the Brookings Institution, Massad concluded that “the United States should create a reasonable regulatory approach for private digital stablecoins like Libra”. CBDCs and private cryptocurrencies might coexist for a while. Only time will tell if the fate of the CBDCs will ressemble more the Minitel or the Internet. However, historical evidence shows that governments and central banks are better at creating enabling environments for new technologies and services than by providing these services in their own right.

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