Central Bank Digital Currencies - Part 2

Abraham George Market Musings

This is in continuation to my writings on CBDCs. China is probably the leading country who will adapt to using a digital currency. So far, the US is far behind in any introduction or discussion on this front though the Fed Chairman did announce that there will be an open discussion about it this summer. China is planning to test its digital Yuan payment system in Feb 2022 when they hold the Winter Olympics.

Facebook’s plans to create its own digital coin was not well received by the authorities in 2019. It prompted fears that it could undermine the traditional global financial system. With a global reach of approximately 2.4 bio people, Facebook has not fully abandoned the plan and on the contrary could be working on something closely with the US administration secretly. Their recent actions to rename the project to Diem from Libra and very abruptly move its headquarters from Switzerland to US raises a lot of questions. I highlighted this in an earlier article.

Trend for declining cash use has been accelerated by COVID-19 as more people shop online and opt for contactless payment options. One fourth of US consumers used cash less often since the pandemic began. The number of unbanked adults across the world is approximately 1.7 bio. There is a growing need for a more effective way for governments to pay benefits or stimulus money directly to citizens especially to the unbanked.

So far, the following is the biggest endorsement CBDCs have received that I have read:

If CBDCs are cheaper , faster , more secure for users , we should explore it. If it’s going to contribute to better monetary sovereignty , better autonomy, we should explore it. If it’s going to facilitate cross border payments, we should explore it.

- Christine Lagarde , ECB President

Currently, the vast majority of CBDC intitatives are focused on domestic use cases and in a 2019 BIS survey, Central Banks rated cross-border payments as among their least important considerations. These may be due to infrastructure concerns and fears like KYC, AML checks. Having its CBDC circulating in foreign jurisdictions will also impact a Central Bank’s policy monetary policy and liquidity management.

It is surely short sighted to overlook cross-border requirements just because these requirements come with additional challenges. In a globalized world, we cannot do without cross border transactions. Much like being part of a trading block benefits member nations, consumers and businesses will have to transact with foreign suppliers and vendors.

We will close this discussion with the next report and focus on what real solutions exist in implementing a digital currency by Central Banks.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.