Central Bank Digital Currencies will usher in a new world
Abraham George Market Musings
I’d promised to write more on XRP (Ripple). I have since been gathering more information on it. There is something we all need to understand. There is a tectonic shift that’s going on in the world all over about the way we will exchange and transact money. This shift will effect everyone, increase access to financial services for the underbanked and unbanked populations and enhance direct person to person payments. This will be the first steps towards the total elimination of physical cash.
The catalysts to all this will be the Central banks around the world. One thing we have to understand is whatever changes that will take place in the private sector, the Central banks will never abdicate its monopolistic control of money. About 80% of world’s central banks are exploring and working towards the adoption of a central bank digital currency (CBDC). So what is a CBDC? It is the sovereign equivalent of private cryptocurrencies and digital assets like Bitcoin, Ethereum and Ripple.
The only similarity is it is much like cash but in digital form. It will be used by retail and businesses and for wholesale settlements in the interbank market. It is a natural evolution of how we exchange value. But not necessarily the CBDC development should simply follow the old progression. Our existing currencies were created in a much less globalized world and are not designed for efficient exchange. It will increase the speed and efficiency of payments, while reducing costs and failure rates. It should reduce barrier to entry and boost access to global markets through interoperability. It should ensure central banks retain sovereignty over monetary policy and not allow alternative currencies to dominate the market.
Compared to many other leading Central banks the US has been slow at least publicly to announce about their plans about a digital currency. However Fed Chairman declared recently that they will have an open discussion about the ‘Fed Coin’. Through the power of blockchain technology, financial institutions are already enabling seamless, instant global payments. Therefore each central bank will also be pursuing a digital currency that will be driven by specific market challenges and opportunities. While each Central bank is mainly focused in solving their own domestic problems, the global nature of trade and finance means cross border coordination should be built into the original pan of developing the CBDC.
As I wrote previously, the Internet became a global tool for the exchange of information because there was agreement at the global level in using certain common standards. In the same way, CBDCs should adopt open payments protocols and use neutral bridge assets to facilitate a frictionless exchange of value across borders.
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.