Introduction of central bank digital and smart currency is just as much a political, macroeconomically and financial stability issue than a technology issue.
We are nearing the end of an eventful year for Bitcoin, cryptocurrency, stablecoin and central bank digital and smart currency (CBDC). The Bitcoin price has skyrocketed, helped by professional investors taking positions with tens of millions of Euros. Private individuals in many rich countries have never in history had so much capital available for savings and investment as now. At the same time, the deposit interest rate in bank is close to zero, and in some countries negative, which it is likely to be for many years (in Japan last 20 years). Stablecoin such as USDC, Tether, JPMCoin and eventually Diem (formerly Libra) have made new friends and new distribution channels to benefit new customers. China launched its digital central bank currency in April and has now rolled out to 5 different areas in China with more than 100 million inhabitants. They have conducted air drops in the form of lotto a few times to bring up the number of users. More than 9,000 stores, online trading platforms and public payments now accept e-RMB (the name of the CBDC/DCEP). They have also worked with the customer interface and removed many of the frictions that banks normally have by using wallets for AliPay, WeChatPay and the banks' mobile banks, in addition to providing offline payments by the wallet in the mobile phone acting as a physical debit card in the payment terminal (POS) instore. There are now a handful of central banks around the world that have done the same and launched retail CBDC to the public and companies.
Brexit will occur on January 1st 2021. London has been the financial capital of Europe for more than a thousand years. And they will be for many years to come. It probably started with a Scandinavian Viking named Ganger Rolf and his descendant Wilhelm the Conqueror who in around year 1100 introduced the principle of tally sticks, a distributed ledger architecture (DLT) with physical wooden sticks that eventually became government bonds traded on the London markets. A few years ago, the consensus was that the financial district of London would be emptied and that Amsterdam, Paris and Frankfurt would take over the role of financial capital in Europe due to Brexit. But while the European capitals competed, London grew. The global bank JP Morgan currently has 2,000 more employees in England than before 2016. Goldman Sachs has 900 more and MFUG 400 more. Although many have also employed more people in Central Europe, the increase is largest in London. Even BNP Paribas and UBS have increased their staff in London.
One of the effects of the future competition between Mainland Europe and London may well give energy for increased digital transformation, removal of friction in value transfer, better climate for anti-corruption (AML) and shorter value chains in business. In addition to artificial intelligence (AI) and IoT, DLT (Distributed Ledger Technology) are the technologies that is likely to grow fastest in the coming years and enable the digital transformation that will be needed. Media writes that queues of 100 km long are expected with trucks on both sides of the canal, where only a few have the correct customs documents in order after January 1st. The challenge is not the physical movement of goods, this has been working for many years, but the administration of the papers. Up to 20,000 trucks have passed daily between England and Central Europe without any physical problems.
Might it happen that the Bank of England will find that they should launch their digital pounds faster than originally planned in order to speed up the settlement of trade with Europe? Programmable digital money also provides a lot of efficiency in addition to “only” payments. Will countries in Central Europe that are most affected, such as France, Germany, the Netherlands and Denmark, also push the ECB to set the pace? With a large imbalance in the economy, the risk of setting the pace is less than when everything is in balance. This is one of the reasons why it is easier to make the decision on CBDC in the East Caribbean Central Bank than in the European Central Bank. If the ECB sets the pace, it could have major ripple effects.
The European Central Bank (ECB) has announced that it plans to launch some kind of technical pilot of a digital Euro by the summer of 2021. It is conceivable that they will do as others, start several projects in parallel, like Singapore. At the same time, it is bubbling beneath the surface in that Spain, Italy, France and Sweden are doing their CBDC pilots on their own. (digital pesetas, digital Lira, digital Franc and eKrona ?). For several years, the EU has also wanted the Euro to be used much more in international trade instead of the US dollar. They have also repeatedly stated that they want a European competitor to Visa and Mastercard. They have also established a European competitor to SWIFT, without much of success. SWIFT performs most of international settlements in New York. Possibly the EU will accelerate further in 2021, and especially with both Brexit and China in mind? It is however important to remember that EU have 19 very different countries using Euro as their currency today including Estonia, Finland, Germany, France, Italy, Greece, Slovakia and Malta. Each country has their own central bank, their own financial regulator and their own parliament. EU also have some very fragmented non-Euro countries like Sweden, Croatia, Poland and Romania.
Norway is the country in Europe closest to been cashless, even less cash than in Sweden. Norway is not a member of EU, but a member of the European Economic Area. Less than 3 % of physical shopping is with cash. I myself cannot remember last time I used ATM or paid by cash in a shop in Norway. Maybe it is more than 5 years ago? Payment is extremely fast and reliable. From one bank account to the next in a few seconds. Close to 100 % of Norwegian have a bank account (zero unbanked) and on average Norwegians bank with 1,8 banks (using more than one bank). CBDC or stablecoin will not improve the payment or digital infrastructure when it comes to speed or ease of use. But the effect of programmability in CBDC and the token design might give us a lot of benefit and new services. As ECB, the Norwegian Central Bank is also planning to start a POC/pilot by summer of 2021.
Norway have something else that is a prerequisite for a successful digital currency, including CBDC. Digital identity. Close to all Norwegians have something we call BankID. A separate company established and own by all Norwegian banks, a 3 factor identification process digitally. Using BankID we can open bank account in a new bank, file our tax papers online with tax authorities, collect our health record from doctors and hospitals, buy and sell real estate, apply for schools and universities and a lot of other digital services. All the way by using one safe, secure and single BankID. Sweden and Denmark also have something of the same.
Joe Biden and the United States
The US presidential election is decided in Biden's favor, after a month with some bumps in the road. Biden is a trained lawyer and was for almost 40 years a senator for the state of Delaware, until January 2009. Not only does Biden have a good education, unlike some other presidents, but he seems to gather the most competent administration that the United States has had for many years when he occupies the White House in January. Could it affect the speed of digital transformation in the United States and new digital dollar sooner? Under Biden, Delaware has moved to become the most digital state in the United States in terms of public administration and in particular when it comes to companies. Registering a new company, updating annual accounts, tax information and closing companies is largely done digitally. This is one of the reasons why many companies choose to register there, simply because it is easy. That it is easy to hide who is the rightful owner of the companies, may not be as positive in our eyes. Already in 1974, while Biden was a senator, the state of Delaware established the "Delaware Broadband Fund" to provide the Internet and eventually broadband to everyone. In 2009, they created DTI (Delaware Technology & Information) a project to move as much public administration as possible into the cloud as the first state in the United States. Now 80% is cloud-based. DTI also has projects for digital identity, Open Data and API standardizations and a number of other projects.
Biden will probably take this with him into the White House and engage in a renewal of the United States that must necessarily include digital transformation. Digital transformation is more of a change in culture, people, processes and business models than a purely technological change. Given the huge use of checks and cash in the United States, new digital money should become an important piece for Biden & Co. One of the most important arguments the ECB used to justify the work with digital Euro is that it supports and enables a digital transformation in Europe with the effect improved competitiveness.
In recent years, the United States has tried to push China into a corner both economically and technologically. In more and more fields, it seems that the result is that China has mobilized to bite back instead of bowing. China has also developed a large domestic market, increased the group of middle-class people by a few hundred million and established alliances that make them less and less dependent on USA. The "belt & road" that China has established covers countries with a total of 4 billion people. One example is Huawei which is losing access to US computer chips. In the last 18 months, they have invested significantly in Chinese chip manufacturers through the Hubble technology fund with 413 million US dollars. The purpose is to be self-sufficient in computer chips. Given that the processors may be faster than those produced in the West, this might give us unexpected challenges within a few years.
For example, a laboratory in China has completely parked Google's quantum processor. Where Americans use traditional building-blocks based on chip technology, the Chinese use light. They have developed sensors that measure every single photon and created computer chips that use light instead of electricity. According to an article in "Nature", the Chinese processor implemented what a supercomputer today will spend 2.5 BILLION years on, in just 200 seconds. But unlike Google's machine, the Chinese is not programmable. It is designed to solve one and only one unique problem, a long iterative computation known as "the boson sampling problem".
Top down or bottom up.
China and the United States have two diametrically different approaches. China has a top-down strategy where important decisions are made by political leadership and much of the funding comes from public funds. For example, in December 2019, President Xi stated that “blockchain technology will play a vital role in the future industry. We must increase the use and leverage of this technology”. The effect was more money was invested in Blockchain/DLT and crypto-based projects. At the same time, they made it difficult for Bitcoin and foreign projects. The result is many thousands of small companies working with Blockchain / DLT, by far the most patents in the world and this year central bank digital currency (CBDC).
The United States has always been driven by private forces and innovation. The public sector has many times supported the private sector through public-private projects. It brought the first Americans to the moon and it seems to carry a new generation both to the moon and to mars through the Space-X project. The Digital Dollar project, which has developed as a collaboration between the Fed in Boston and MIT, is also one such a project. They have started physical testing of a DLT based digital central bank currency. The Libra project (changed its name to Diem on December 1) has its roots in the United States, in addition to the fact that the entire crypto and stablecoin movement started there. But as Shoshana Zuboff writes in her latest book, "The pace of democracy is slow in nature, because it is burdened by redundancy, control mechanisms, laws and rules." The emergence of cryptocurrency and stablecoin has so far been with less laws and regulations.