An important development in the transformation of the global banking and financial services market is the emergence of central bank digital currencies (CBDCs). Various central banks, first and foremost the People’s Bank of China, have increased their efforts to launch a CBDC in the near future. Furthermore, many central banks are currently engaged in international collaborations and transnational standard-setting endeavors concerning CBDCs. While it might be too early to reliably predict the trajectory for both CBDCs and cryptocurrencies, the developments to date suggest that monetary sovereignty is a key motivation for launching a digital currency – be it public or private. This means nothing less than that both public and private actors are competing for monetary sovereignty in a global marketplace in which economic and financial exchanges are increasingly digital.
The Emergence of Central Bank Digital Currencies
The wide attention that the first examples of CBDCs attract is not in small part due to the discussion around (global) stablecoins (see my previous blog). The disruptions to global economic and financial transactions during the Covid-19 pandemic have further added momentum to ongoing CBDC developments. A CBDC is an electronic record or digital token of a country’s official currency that is issued and regulated by the nation’s monetary authority or central bank. Pursuant to a 2021 survey of the Bank of International Settlement (BIS) of over 60 central banks (which together represent close to 72% of the world’s population and 91% of global economic output), 86% of the surveyed central banks are actively researching the potential for CBDCs, 60% were experimenting with the technology, and 14% were running pilot projects (among them are the central banks of China, Sweden, Singapore, and South Korea). The world’s first nationwide CBDC has been launched by the Bahamas in October 2020 (the digital B$, also called the Sand Dollar). The currency area of the Eastern Caribbean Central Bank launched its retail CBDC DCash as a large-scale, year-long pilot in March 2021. These two live CBDCs are likely to be joined by others; central banks representing collectively a fifth of the global population have announced to issue a general purpose CBDC in the next three years. The Bank of Canada is researching potential system designs and business models for a digital currency denominated in Canadian dollars and is further involved in the transnational discussions around CBCDs, but has currently no plans to issue a digital currency.
China Leads the CBDC Race
Notably, China is likely to launch its own CBDC, the digital yuan (e-CNY), during the Winter Olympics in February 2022, which is currently challenging Southeast Asian countries in particular. Taking advantage of the fact that Alipay and WeChat-Pay already have digitized China’s payment system, the digital yuan, a project China has been working on since 2014, is in advanced state of testing. The e-CNY is distributed to consumers by the People’s Bank of China (PBoC) via six major commercial banks, usually through a wallet app. The PBoC and e-CNY operating institutions conducted large scale pilot programs in over nine major Chinese cities, including Shenzhen, Beijing, and Shanghai. According to Bloomberg, the e-CNY pilot reached 34.5 billion yuan ($5.3 billion) in transactions with 21 million individuals using the virtual wallet by mid-July 2021. And pursuant to a statement by a top official at the PBoC earlier this month, China has increased the number of individuals with e-CNY accounts to 140 million, with 10 million corporate accounts created. China thus seems to be on the verge of rolling out its own digital currency.
A whitepaper on e-CNY research and development published by the PBoC in July 2021 is informative in several respects. First, it clarifies that the e-CNY will obtain programmability from deploying smart contracts that do not impair its monetary functions, which will enable self-executing payments (and shows that a CBDC can be much more than “just” digital money). Secondly, it implies that, by introducing its own CBDC, China aims to compete with (if not oust) other digital currencies (such as cryptocurrencies, stablecoins, and foreign CBDCs), while ensuring that the renminbi continues to be the dominant currency in China (longer-term goal) as well as to complement today’s private-sector run electronic payments system by providing a cash-like digital payment method that is accessible to all, low cost, and (to a certain extent) anonymous (shorter-term goal). Thirdly, the whitepaper suggests that China is to explore cross-border payments in e-CNY and is willing to discuss transnational CBDC standard-setting and to work together with other monetary authorities to develop a multi-CBDC arrangement. Currently, the PBoC is already cooperating with the BIS and the monetary authorities of Hong Kong, Thailand, and the United Arab Emirates (UAE) to develop a multi-CBDC platform for international payments (Project Inthanon-LionRock, recently renamed mBridge). Critics argue, however, that China’s aims are more sinister. According to them, the e-CNY presents a tool for increased government surveillance, giving the Chinese Communist Party a window into every transaction made in China, and that its introduction actually represents a deft technological move by the Chinese government to subvert the primacy of the US dollar as the global reserve currency.
Beijing’s ambitions to purse alternative cross-border payments channels built upon CBDCs have, according to officials of the Biden administration, given new impetus to efforts to consider the creation of a digital dollar. However, no decision has yet been taken on whether to issue a CBDC in the U.S. payment system. Since officials at the Fed seem to be increasingly divided over whether it ought to issue a digital dollar, it is unlikely that this will change in the near future. An upcoming Fed paper discussing the potential adoption of a U.S. digital currency will not take position on whether the Fed will, or even should, create one, but instead only begin a major public consultation on central bank digital currencies. The paper’s release has been repeatedly postponed but should now be imminent. At his post-meeting press conference on 22 September 2021, Fed Chair Jerome Powell said: “I don’t think we’re behind. I think it’s more important to do this right than to do it fast.”
The European Union is moving at a similar speed in this matter. In July 2021, the European Central Bank (ECB) decided to launch a 24 months-long investigation phase of a digital euro project. The investigation phase aims to address key issues regarding the design and distribution of the digital euro and shall be followed by a three-year realization phase. While many (design) details are thus still unclear, citizens are expected to receive digital wallets or apps from commercial banks on which they can store digital euros, and the ECB seems to be leaning towards not using blockchain. Rather, the already existing instant payment settlement platform, TARGET Instant Payment Settlement (TIPS), which was launched in Italy in 2018, could provide the technical basis.
According to the ECB, a digital euro “must be able to meet the needs of Europeans while at the same time helping to prevent illicit activities and avoiding any undesirable impact on financial stability and monetary policy”. In a speech delivered to the European Parliament’s Committee on Economic and Monetary Affairs two weeks ago, Fabio Panetta, Member of the ECB’s Executive Board, stressed that “the digital euro will not be able to be everything everyone wants it to be on day one. We will need to strike a balance to design a digital that is immediately valuable to users but can be developed in a reasonable time frame.” The Bundesbank President Jens Weidmann recently expressed similar views and further underlined that the sticking point is anonymity as it is clear that the digital euro will not be able to offer the anonymity of cash. And Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, argued in an interview last month that the introduction of the digital euro is a “project-of-a-century” that is mainly about trust, because in the end, the digital euro will remain a euro. It is remarkable how openly the political character of the digital euro is currently addressed in the (German) debate on the digital euro project.
Transnational Discussions: A Hippocratic Oath for CBDC Design
In October 2020, the Bank of Canada, ECB, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, and Board of Governors of the Fed, together with the BIS, published a report which, by highlighting the importance of providing trusted money to the public as a public good and core responsibility of central banks, lays out key principles and core features of CBDCs. The report stipulates three common foundational principles:
- new forms of money supplied by a central bank should continue supporting the fulfillment of public policy objectives (such as providing trusted money to the public) and should not interfere with or impede a central bank’s ability to carry out its mandate for monetary and financial stability (the premise to “do no harm” or, in the words of BIS General Manager Augustín Carstens, a “Hippocratic Oath for CBDC design”);
- new (CBDC) and existing (cash, reserve, or settlement accounts) types of central bank money should complement one another and coexist with robust private money (such as commercial bank accounts) to support public policy objectives (“coexistence”); and
- CBDC features should promote innovation and competition to drive efficiency in a jurisdiction’s payment system to prevent users from adopting other, less safe instruments or currencies (“innovation and efficiency”).
Noteworthy is the report’s emphasis on the continuing “coexistence” of both central bank and private money, which suggests in particular that the role of commercial banks shall not be in any way displaced, and further its anticipation that, in order to deliver the desired policy outcome and enable innovation that meets user’s evolving payment, ”any CBDC ecosystem would involve the public and private sectors in a balance”.The report also repeatedly underlines that CBDC design and issuance are sovereign decisions to be made by each jurisdiction and emphasizes the need to protect monetary sovereignty, given the impact that significant adoption of stablecoins, cryptocurrencies, and foreign CBDCs (risk of digital currency substitution) could have on monetary policy and the ability to support financial stability. The issue of monetary sovereignty thus unsurprisingly plays a key role in today’s transnational regulatory discourse on CBDCs.
Moreover, a special focus is currently being placed on the international dimension of CBDC projects and the extent to which CBDCs could be used for cross-border payments. A joint report released by the BIS Committee on Payments and Market Infrastructures, the BIS Innovation Hub, the International Monetary Fund (IMF), and the World Bank in July 2021 highlights the need for multilateral collaboration on macro-financial consequences as well as the importance of interoperability between CBDCs in order for CBDCs to contribute to “faster, cheaper, more transparent, and more inclusive cross-border payments services”. However, it is precisely the international dimension of CBDCs that is still very much under-researched (“hic sunt leones”).
The Battle for Monetary Sovereignty
While it might be too early to reliably predict the trajectory for both CBDCs and cryptocurrencies, which more recently include a rise in (global) stablecoins as well as their potential coexistence, the developments to date suggest that monetary sovereignty is a key motivation for launching a digital currency – be it public or private. This means nothing less than that both public and private actors are competing for monetary sovereignty in a global marketplace in which economic and financial exchanges are increasingly digital. The wide-ranging regulatory backlash provoked by Facebook’s 2019 attempt to launch its own global digital currency, Libra, then renamed Diem, the blanket ban of crypto trading and mining by China’s top regulators in September 2021, and the above briefly outlined CBDC developments are all, albeit in different ways, indications thereof.
Despite the long history of global financial movements and although the 2008 financial crisis has shown that financial globalization and the rise of credit-based financial systems went hand in hand with a shift in relevance and importance from territorial to monetary sovereignty, the concept of monetary sovereignty itself has only too rarely been critically scrutinized. If at all dealt with, monetarysovereignty is – at least in legal literature – still typically understood in a Westphalian sense to denote a state’s ability to issue and regulate its own currency. Such a state-centric, territorial conceptualization of monetary sovereignty is, however, increasingly problematic: For one, it risks missing the hybridity of the modern credit money system in which central bank money, private bank money, and “near money” issued by (often “offshore” operating) shadow banks all play crucial roles. Secondly, it might ultimately not be suited to deal with the increasing proliferation of digital currencies as part of a much larger, long-coming digitalization of global financial movements. Much suggests that these new forms of digital “money” require an alternative form of political assessment and regulatory control, which focuses on data and digital infrastructure in order to capture the complex tensions between public and private financial institutions that characterize the present moment.
Aliénor Nina Burghartz - Graduate Research Trainee McGill Law School