Financial inclusion may be a selling point for digital currencies — but other risks may outweigh those rewards.
There is any number of pathways to the creation and deployment of digital offerings that may serve as replacements to — or depending on how you look at it, adjuncts to — paper bills and coins.
Bitcoin is but one obvious, highly visible example. PayPal and the card networks provide on-ramps for spending crypto at merchants that accept PayPal, Mastercard and Visa, respectively. Tesla has said it will accept bitcoin payments directly, without conversion to fiat.
Stablecoins are becoming more widely available, of course, where digital coins such as Circle’s USDC and the stablecoin known as tether, backed by dollar and other liquid holdings, are gaining scrutiny by regulators that want assurances that reserves are not only adequate but dollar for dollar.
We’re seeing at least some initial forays in central bank digital currencies. As is well known, China is at the forefront here, with much smaller nations such as the Bahamas having launched digital legal tender (in this case, the Sand Dollar).
However, all eyes are on the U.S. Federal Reserve and that central bank’s efforts are and will be key to what happens to digital currencies on the world stage. For where the dollar goes, many will follow. The greenback, of course, is the world’s currency unit of reserve.
As detailed in interviews in this space through interviews between Karen Webster and Jim Cunha, the Fed’s senior vice president of secure payments and FinTech, ongoing efforts between MIT and the Boston Fed have been focused on speed, throughput and resiliency.
But beyond the key focal points of the technology itself, the ways and means of getting digital currencies up and running, lie some thorny points yet to be addressed. Namely: The digital currencies can be built, so to speak — but should they?
And two recent analyses by, respectively, the International Monetary Fund and The Clearing House, seem to point the way toward central bank digital currencies — but there may be some bumps in the process.
To that end, the International Monetary Fund said in a blog this past week, though digital money has promise — in speeding payments and making them cheaper, and in boosting financial inclusion — getting there will not be a straight and narrow path.
Digital money, according to the blog, “requires significant investment as well as difficult policy choices, such as clarifying the role of the public and private sectors in providing and regulating” those digital offerings.
No Seamless Transitions
Some paths are riskier than ever, according to the IMF: Chief among those risky decisions, to use cryptoassets as national currencies. We contend, then, that El Salvador’s recent decision to use bitcoin as legal tender would raise numerous red flags.
The cryptoassets are unlikely to catch on in countries that are marked by stable inflation and exchange rates. That would mean that stable countries and trading blocs — the EU, U.S. and China among them, would shy away from a wholehearted embrace of cryptos.
“A cryptoasset might catch on as a vehicle for unbanked people to make payments, but not to store value. It would be immediately exchanged into real currency upon receipt,” said the IMF. That’s likely another nail in the argument that cryptos would be widely used in retail and commercial settings.
Separately, the Clearing House, in its own submission at the end of last month, said “policymakers should articulate a clear purpose for a U.S. CBDC. Identifying the purpose is “an essential first step, as it will inform other design choices that will need to be made to ensure that the CBDC’s stated purpose is being advanced.”
The TCH and IMF papers train a spotlight on the fact that the existential questions about cryptos have yet to be addressed. We submit that may be because, at least in part, the crypto aspect — the bitcoins, Dogecoins, etc., and thousands of others, are launched in a way that has a “gee whiz” factor built in, first, and the discovery of use cases (and in the case of bitcoin, with long and expensive processing times, limitations) later. Consider that non-fungible tokens (NFTs) were all the rage not all that long ago, but now seem to be a bit of a solution looking for a problem.
The central banks that may be looking at China as a key threat in a “digital currency arms race” may be rushing toward a similar proof-of-concept that then begs the question: What’s next? What is feasible may not be preferable if Fed “digital dollars” must be capped, as some have suggested (and as relayed in the TCH report). The fact remains that digital payments have taken root quite handily, where contactless volumes across borders have surged (as evidenced by the payment networks like Visa and Mastercard). Account-to-account transfers have also improved and are improving B2B transactions, which have been a key target for wholesale activity involving stablecoins.
And there there’s the U.S. consumer, 16 percent of whom either has owned or currently do own cryptocurrency, according to research by PYMNTS and BitPay. And why? For investing, but also with an intention to spend using them. Of those consumers, 57 percent have made at least one purchase with their cryptoassets in the past year.
For bitcoin then, for stablecoins and even for digital dollars, perhaps no smooth path lies ahead.