Several major banks across Asia have joined forces to construct a cross-border central bank digital currency, according to a joint announcement issued on Feb. 23.
Dubbed the Multiple Central Bank Digital Currency Bridge — or m-CBDC — the project sees the Hong Kong Monetary Authority, the Bank of Thailand, the Central Bank of the United Arab Emirates, and the Digital Currency Institute of the People’s Bank of China combine to create a CBDC prototype using distributed ledger technology.
Building upon the “Inthanon-LionRock” research project started in 2019, the latest phase of the exploration into CBDCs will develop a proof-of-concept to “facilitate real-time cross-border foreign exchange payment-versus-payment transactions in a multi-jurisdictional context and on a 24/7 basis,” states the announcement.
The stated aim of the project is to address “pain points” in conducting cross-border transfers. These include cost inefficiencies and the complex regulation which accompanies moving money from one country to another.
As previously described by the deputy governor of the Bank of Thailand, Mathee Supapongse:
“The model offers a cross-border corridor network where participants can transfer funds instantaneously on a peer-to-peer basis and in an atomic PvP manner. The design and key findings of the project have added new dimensions to central bank communities’ studies on cross-border funds transfer area.”
The central banks taking part in the project hope to attract more institutions into the scheme and aim to create a more conducive environment for the exploration of CBDCs in Asia and beyond.
The rapid emergence of cryptocurrencies in recent years has forced the hand of numerous governments and central banks to create a digital alternative to decentralized coins like Bitcoin (BTC), Ether (ETH), and many others.
The inability of governments to control or track the flow of cryptocurrencies will undoubtedly see CBDCs become commonplace in years to come. China is ahead of the curve in regards to CBDC creation and is already testing biometric ID hardware wallets for its digital yuan.
China’s CBDC is about domestic dominance, not beating the dollar
For the past several years, the trade war between China and the U.S. has been at the center of international relations, with technology playing an outsized role.
Within crypto, advancing interest in central bank digital currencies has become part of that narrative of geopolitical competition. Many have framed the development of CBDCs in China and the U.S. as a race — in which case, China is clearly closer to launch and, hence, the “winner.”
But a race to the finish is a flawed paradigm, and one to which Cointelegraph has contributed its fair share. For the moment, China is actively working to get its digital payments infrastructure out from under the overwhelming dominance of Ant Group’s Alipay and Tencent’s WeChat Pay. Longstanding designs upon the U.S. dollar have faltered. The narrative of the digital yuan taking aim at the dollar has most prominently come from U.S. firms who were trying to redirect scrutiny from U.S. regulators onto a foreign threat.
The digital currency race that wasn’t
Though it dragged Alipay and WeChat Pay into the geopolitical arena, a midnight executive order from Trump banning use of all Tencent, Alibaba and Alipay apps in the U.S. was more a symbolic attack on China’s malfeasance in international trade that would also complicate Biden’s early diplomacy. Claude Barfield, who studies China trade policy for the American Enterprise Institute, said of Trump’s last-minute move: “That is not rooted in economics, that is just rooted in the last gasp of this administration to set down a record and to in some ways tie Biden’s hands.”
There is also certainly a major competition in tech between the U.S. and China. Martin Chorzempa of the Peterson Institute for International Economics told Cointelegaph:
“I’m under no illusions that the Biden administration is going to let go of the tech competition. The tariff stuff is going to phase out eventually, but my bet is that the tech competition is only going to heat up.”
For all of this hubbub, China’s payments industry has not seen the international penetration necessary to constitute the clear and present danger — which is distinct from other tech firms like Huawei. As far as payments, the firms running them are almost entirely within China’s walled garden. Despite user bases that dwarf U.S. payments apps like Apple Pay or Google Pay, both Alipay and WeChat Pay almost exclusively depend upon Chinese bank account holders for those numbers.
While a digital yuan is obviously a major priority for China, the country’s work against its domestic payments industry proves that it is looking first at home. International usage of the traditional yuan has stalled, despite a slight uptick in the composition of foreign reserve currencies, and clamping down on its internal private payments industry does not help a Chinese CBDC go international..
“Renminbi internationalization has been on the backburner for years now. It continues to be talked about but very few actual decisions have been made to make it usable,” said Chorzempa. “I’m not convinced that the PNC is going to let people use the digital renminbi outside of China.”
The tech monopolies that were
The current anti-monopoly push indeed seems pretty straightforward. Alipay and WeChat Pay control 95% of the digital payments market between the two of them. Adding to the problem is that digital payments have become the standard in China, with many merchants refusing to accept government-issued currency. It’s a problem widespread enough that the People’s Bank of China warned in December that “Renminbi (yuan) cash is the most basic means of payment. Entities or individuals cannot refuse to accept it.”
Keep in mind that plenty of countries would look askance at private hands with such a chokehold on the national payments system. 95% between two private companies is unheard of in any major global economy, and it’s a 95% that is part of two massive conglomerates that independently serve as e-merchants, social networks and messengers. Whatever problems the U.S. faces with its own tech giants are even more heavily concentrated in the Chinese market.
“The Chinese financial regulators reacted just as American, Japanese or European regulators would react,” Barfield noted, referring to a similar antitrust battle in the U.S. “You have this irony where in an authoritarian regime you’re getting echoes of what you’re getting in market economies.”
The IPO offering that almost was
While 2020 saw a number of signals that the Chinese government was going to rein in monopolies that Xi Jinping had allowed to flourish for so long, it was the crackdown on Ant Group’s initial public offering that got everyone’s attention.
Scheduled for November 5, the IPO for Ant Group was supposed to issue $37 billion in equity based on a $300 billion valuation — a world record. At the time, many attributed its last-minute cancellation to Jack Ma’s criticism of China’s financial regulation at the end of October.
A Wall Street Journal investigation published last week suggests otherwise. The results claim that Ant Group had been under investigation prior to Ma’s speech for its opaque ownership. Per that report, the investment vehicles that held private equity in Ant Group stood to gain a fortune when it went public — a fortune that they would then pipeline back into the hands of the richest people in China.
Publicizing underlying beneficial ownership is a very reasonable expectation for a firm about to be let loose upon the public, even when you aren’t already concerned about its stranglehold over financial services in the world’s most populous country.
The crypto outcry that shouldn’t have been
All of which are concerns fairly localized to China. For the foreseeable future, a digital yuan is, likewise, a domestic rather than international tool. In this, the crypto community’s response to its continued development has been interesting.
Many have commented, with more or less skepticism, on a digital cold war. The race to be first simile has also gained enough traction that Fed Chairman Jerome Powell himself took time to dismiss it.
But cycle back through those who have most zealously pushed that narrative. It’s largely composed of people trying to get the U.S. government to look anywhere else. It includes the usual cast of permabulls like Anthony Pompliano, but it’s also heavy on parties facing intensive scrutiny from U.S. regulators.
Mark Zuckerberg threatened Chinese dominance of international payments if Congress continued to stonewall his Libra (now Diem) stablecoin. Incidentally, Tencent said much the same thing about Libra to Chinese authorities. But the biggest culprit has been Ripple.
Almost the entire cast of Ripple’s executive board made effectively the same threat about the U.S. losing the tech cold war to China. Which, in retrospect, seems like a distraction from a firm that was pulling out all the stops to divert the attention of U.S. regulators. And hey, nationalism is a classic card to play. A trump, you might say.
The CBDC that may one day be
None of this is to say that a digital dollar or renminbi doesn’t matter. The point is that framing the competition as a race to be first is risky practice, precisely because it shuts down critical thinking about an important area and also assumes that everyone in the world is chomping at the bit to entrust all of their money to a brand-new technology.
In a January paper, Chorzempa pointed out that China’s private payments giants, which hit the market long after Apple and Google Pay, actually benefited from a second-mover advantage. They could learn from the mistakes of the original American firms. The race paradigm is just inappropriate for money, which people are most conservative about implementing changes to. Less obviously, it’s not even the main consideration when it comes to technology. Think of Skype vs. Zoom, or BlackBerry vs. IPhone.
Congressman Bill Foster spoke to Cointelegraph way back, following the Zuckerberg hearing, about the China argument, when the idea of a race was really taking hold. He said: “When you start to move into financial instruments you have to be very careful that you are not reinventing a lot of the problems that we’ve learned the hard way creep up again and again in financial services.”
Money has a weird set of priorities. Continuing to explain the pros of a digitized dollar, Foster said:
“I think that will be a competitive advantage for the United States and the free Western world, is that we have a transparent court system where you know the rules you’re playing with and you won’t have the party leaders come in and say, ‘ok, I want all your information.’”
Alongside unconsidered advantages like court transparency, it takes much more than a new technology to overthrow the leading global currency. In the U.S.’s case, it took two world wars, economic ascendancy and fears of a global takeover by Communism. As appealing as the idea of digitized bearer instruments that could even skip the hassle of international banking and settlement may be, it’s not going to happen all of a sudden.
China and the U.S. are going to continue to duke it out in the tech arena. But there is a reason people like Chairman Powell or digital dollar advocate J. Christopher Giancarlo had to decry the haste to launch. Money is not something that a government can afford to get wrong.
Many pieces of the Diem puzzle still missing as launch gets delayed
Back in June 2019, social media giant Facebook released the details for a much-talked-about digital currency platform dubbed “Libra.” These days, Libra is known as Diem, with the project undergoing a significant rebranding in a bid to smoothen regulatory wrinkles.
A year and a half later, the Diem Association has yet to launch a digital token with regulatory approval from Swiss authorities yet to materialize. Even if Switzerland’s Financial Market Supervisory Authority, or FINMA, does grant a payment license to the digital currency project, Diem will be debuting its offerings to a global landscape that is significantly more fractured in terms of digital currency regulations than was the case 18 months ago.
Stablecoin regulations seem to be the focus of attention for governments in major economic blocs including the United States and the eurozone. China continues to accelerate the pace of its nation digital yuan project, and despite initial assertions to the contrary, authorities in Beijing appear to have a more domestic agenda for the e-yuan.
Major crypto markets in terms of trading volume like India and Nigeria are becoming increasingly anti-privately-issued digital currencies. In effect, if Diem were to launch today, that would be four prominent digital currency transaction theatres where the legality of the project’s “coin” would be tenuous at best.
When will Diem launch?
In November 2020, the Diem Association announced plans for a limited launch of its project with a U.S.-dollar-pegged digital token. Far from the ambitious plans of a “Facebook coin” backed by a basket of fiat currencies that heralded the debut announcement back in 2019, this new USD stablecoin was a consequence of the successive rebranding attempts necessitated by the vociferous pushback among global financial regulators.
January came and went, and now February is almost over, but no sign of the Diem USD stablecoin. The Swiss FINMA has not approved Diem’s payment system license yet but recent developments in the country around crypto and blockchain regulations likely put Diem’s application in good stead.
Switzerland has established itself as a crypto-friendly nation, allowing the digital asset space to flourish within its borders. Earlier in February, Phase one of the country’s blockchain law focusing on company reforms went into effect. Meanwhile, the second part of the new legal framework, which creates regulatory clarity for trading crypto securities, will become law later in the year.
Plans for the Diem launch received another boost with the announcement of the partnership between crypto security outfit Fireblocks and First Digital Asset Group — a payment provider on the Diem platform. As part of the collaboration, both companies have created a secure wallet allowing financial institutions to process transactions on the Diem network.
Responding to Cointelegraph, a spokesperson for FINMA declined to comment on the status of Diem’s application but confirmed that the licensing process was still ongoing. The Diem Association did not immediately respond to Cointelegraph’s request for comments on the matter.
According to Jackson Mueller, head of policy and government relations at blockchain compliance and financial markets infrastructure outfit Securrency, a Diem launch in Q1 2021 appears unlikely. In a conversation with Cointelegraph, Mueller remarked:
“Several representatives of the Diem Association have made it clear that a rollout will not happen until they meet regulatory expectations and requirements, and it is unclear, at this time, whether and to what extent the Association is close to achieving this.”
Private stablecoins in the cross-hairs of regulators
The Diem announcement back in the Summer of 2019 seemed to spur financial regulators across the world to scrutinize stablecoins. The likely network effect of a digital currency enjoying such benefits of Facebook’s 2.8 billion users seemed to spur intense discussions among national and international regulatory agencies.
According to Mueller, government scrutiny surrounding privately issued stablecoins has increased: “The conclusions and follow-on outcomes from these efforts are unclear, at present, which, I imagine, adds further challenges to the rollout of Diem in the first quarter.”
Apart from the series of congressional hearings that took place in 2019 after the Diem announcement, some congresspeople are pushing for stricter stablecoin regulations. The measures, if passed, would force private stablecoin issuers to comply with banking standards.
Intergovernmental bodies, such as the G-7 and the G-20, have also expressed their concerns about stablecoins, with Diem often being singled-out. These bodies have issued numerous papers and research studies highlighting the potential for private stablecoins to disrupt legacy financial systems.
The European Central Bank recently asked European Union lawmakers for veto powers concerning stablecoins in the eurozone. If granted, the ECB would have the final say on stablecoin regulations with its pronouncement enforceable across the European Union. Indeed, the ECB laid down the crux of its reservations with stablecoins especially those not issued by recognized financial institutions, stating:
“The additional requirements laid down in the proposed regulation for significant stablecoin issuers are therefore welcome. Having said that, these additional requirements may not be sufficient to address growing risks where stablecoins become widely used as a means of payment or a store of value in multiple jurisdictions across the Union.”
Furthermore, ECB President Christine Lagarde is a noted critic of stablecoins and cryptocurrencies in general. Thus, it’s likely that the ECB having veto powers on stablecoin regulations would mean strict compliance mandates for issuers in the eurozone.
Officials in Germany are also among one of the more vocal opponents of Diem in the eurozone. While the country is by no means anti-crypto, Germany’s finance minister, Olaf Scholz, has stated on numerous occasions that the country’s government will oppose Diem’s operation in Germany.
According to Ran Goldi, CEO of First Digital Assets Group, much of the negative sentiments espoused by European regulators stem from a lack of understanding of the Diem model. “I think the ECB is still looking at Diem as a new currency instead of a representation of existing money (as in, they think this is still Libra, a basket of currencies),” Goldi told Cointelegraph, adding: “They should take the time to learn more and perhaps realize there is no threat to their economy.”
CBDC: Central banks answer to Diem and private stablecoins?
Apart from the threat of decidedly onerous regulatory measures, several governments have also begun exploring the creation of their own central bank digital currencies. These sovereign digital currency projects seem to be the response of central banks to the perceived threat of privately issued stablecoins.
Seeing as digitization appears to be the next phase in the evolution of money, legacy finance figures, such as Agustín Carstens, general manager of the Bank for International Settlements, have argued for central banks playing a key role in the pivot to digital currencies.
According to a recent BIS survey, about 86% of major central banks are studying CBDCs. China’s e-yuan project is currently undergoing several testing protocols, with banks in the country helping to bootstrap adoption by creating hardware wallets for the digital currency/electronic payment.
Related: China turns up pace on CBDC release, tests infrastructure prior to adoption
There also seems to be a significant level of international collaboration surrounding CBDCs. Recently, the central banks of China, Thailand, the United Arab Emirates and the Monetary Authority of Hong Kong inked a partnership to create a cross-border CBDC. These international collaborative projects appear to be geared toward establishing protocols for interoperability among national CBDC projects.
In India, the country’s central bank has confirmed that it is actively developing a digital rupee. According to a recent statement by Shaktikanta Das, governor of the Reserve Bank of India, the RBI is “very much in the [CBDC] game” and wants to follow China’s footsteps in creating a digital companion to its national currency.
Meanwhile, India’s government is reportedly close to issuing a blanket ban on cryptocurrencies, which will include stablecoins. People with knowledge of the plan have been speculating, saying that crypto owners will be given a transition period to sell their digital currency assets.
India is Asia’s third-largest economy and a potential market base for Diem payment transactions. Already, another major arena like China with its DCEP could be a difficult proposition for Diem to achieve significant adoption.
In Europe, the ECB wants stablecoin veto power but has said that any digital euro created by the central bank will be exempted from digital currency regulations enforced on other stablecoin issuers. Nigeria — Africa’s largest economy — has banned banks from servicing crypto exchanges.
Even with a license approval by FINMA, Diem might have a few regulatory hurdles to navigate seeing as major economies are not looking to allow the disintermediation of their legacy banking systems without a fight.
FCA releases detailed 5-point plan to make UK a fintech powerhouse
Upon the announcement of the United Kingdom budget for 2020, Chancellor Rishi Sunak commissioned Ron Kalifa to conduct an independent review of the U.K. fintech sector. On Friday, eight months later, the FCA published the 108-page report, and it contains multiple clear guidelines aimed at cementing the U.K.’s position as a fintech powerhouse.
Over $95 billion was spent by U.K. fintech firms in 2019, and with 10% of the global market share, the U.K. is already ahead of the curve when it comes to fintech adoption and business. Investments in U.K. fintech firms totaled $4.1 billion in 2020, notes the report — more than the next five European countries combined.
Kalifa still identified areas where the U.K. could improve its approach to creating a welcoming environment for the next generation of fintech players.
“However, the trajectory of UK fintech is at an inflection point of opportunity — and risk. While the UK’s position is well established, its future is not assured,” notes the report.
The three main threats to the U.K.’s current fintech dominance are identified as COVID-19, Brexit and overseas competition. Concerning the pandemic, the report notes that the lockdown has accelerated the adoption of digital technologies in a way that policy and marketing never could, and whichever country comes to this realization first stands to benefit the most.
With that in mind, the report proposes five key ways in which the U.K. can create an environment more conducive to fintech in the coming years.
Policy and Regulation
The report recommends the U.K. create a new regulatory framework for emerging technologies and urges it to create a digital finance package for this purpose. A “scalebox” should be created to support companies focused on scaling new technologies, and a digital enforcement task force should be formed to ensure uniformity among government bodies, notes the report.
Additionally, the report suggests that fintech firms themselves should have their voices heard when it comes to trade policy.
Focusing on the social aspect of the inevitable digital transformation, the report recommends that education services should be created to retrain and upskill adults. A pipeline of fintech talent should be formed to support fintech scaleups by offering work placements to students in further and higher education, it adds.
Concerning investments in fintech firms, the report proposes that existing Enterprise Investment Schemes and venture capital trusts be expanded, while research and development tax credits for fintech firms should be increased.
The report calls for the creation of a 1 billion euro ($718 million) fintech growth fund and recommends that a group of fintech indices be built to enhance global visibility for the industry.
The creation of an international action plan for fintech and the launch of a “Fintech Credential Portfolio” would enhance international credibility and make the process of conducting international business easier in general, the report states.
The report suggests existing Centres for Financial Innovation and Technology should be better utilized to drive international collaboration, while an international fintech task force should be launched to ensure alignment between participating countries.
Focusing on fintech development within the U.K.’s own borders, the report proposes that the top 10 fintech clusters should receive particular attention and should be nurtured to achieve their highest growth potential.
Notable growth clusters have been identified in Edinburgh, Scotland, where the number of fintech firms has increased from 26 to 151 in just over two years with the help of enterprise funding. Other notable clusters within the U.K. include Cardiff, Wales; and Manchester, Leeds and Birmingham in England.
The report notes that the goal is not to neglect other areas of the country but to ensure that existing fintech hubs can reach their full potential.
Nik Storonsky, co-founder and CEO of London-based fintech firm Revolut, said the Kalifa review could provide a pathway to ensuring the U.K. retains its place among the top fintech destinations in the world:
“It is essential to preserve and strengthen the UK’s position as the first choice to launch and grow a fintech business. I welcome the Kalifa Review and the Government’s commitment to ensuring that the UK remains a world leader in innovation and growth.”
Referencing the U.K.’s newfound independence in the wake of the Brexit agreement, Ashok Vaswani, CEO of consumer banking and payments at Barclays, said:
“As the UK looks to forge its own path in the world, it is absolutely right that the Government explores how it can ensure the ongoing success of the UK fintech sector.”
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