Three catalysts are causing a fundamental reorientation of domestic and international monetary and payment systems: Facebook’s Libra, China’s central bank digital currency (the Digital Currency / Electronic Payment (DCEP) system), and the COVID-19 pandemic. These catalysts stand in stark contrast to all previous disruptions and are the focus of our new paper.
First, and crucially, each catalyst is likely to have a systemic effect on domestic and international payment systems. Second, all three systemic catalysts are operating concurrently. Third, all three are mutually reinforcing – developments and regulatory changes affecting one will often directly affect the others.
While Bitcoin has drawn much attention since its launch in 2009, Facebook’s announcement of Libra in 2019 – its own cryptocurrency combined with a global digital payment system and digital identification system via Facebook/WhatsApp/Instagram Pay – was the first catalyst of sufficient scale and potential to lead central banks to rethink their approach to sovereign digital currencies (SDCs). It highlights the true potential of technology to revolutionize money and payment. While much of the focus so far has been on the role of distributed ledger technology and blockchain, centralized payment systems likewise have transformed as a result of technology – both retail (“fast payment systems”) and wholesale (“real time gross settlement systems”).
Libra intrudes into the traditional preserve of sovereigns – the creation of currency – and thus was likely to provoke central banks to protect their territory. This explains the strong and coordinated efforts to bring Libra within their supervisory ambit ass well as attempts to roll-out SDCs to respond to the challenges of Libra and new technologies to existing frameworks of money and payment. Clearly the most significant development would be the launch of a major currency SDC, such as the DCEP announced by China a few months after the Libra announcement. However, trials of DCEP did not occur until the third catalyst, COVID-19, prompted China to begin transforming its domestic monetary and payment system. Live trials of DCEP are currently underway in China.
When the digital yuan is fully launched, it will most likely be the first central bank digital currency (CBDC) from a major economy. Its launch will have significant international impact, since it will almost certainly trigger the acceleration, activation, or development of a number of similar projects around the world, both among those looking to engage with it and those seeking to compete with it. At the same time, the COVID-19 crisis is already forcing central banks and governments around the world to consider urgently whether they can and should develop and implement their own CBDCs. CBDCs are being seen as a tool that could greatly improve a government’s ability to direct stimulus payments to citizens in nations such as the U.S. that lack effective, up to date, and comprehensive payment systems.
The most significant potential CBDC would undoubtedly be a “digital dollar,” which would have global impact. While discussions have been taking place for some years with little progress, the combination of technology, private competition, geopolitics, and domestic need is driving discussions in an entirely new way. As one example, a digital dollar proposal was included (but not enacted) in U.S. legislative responses to COVID-19 in March 2020. Since then, discussions have become more seious, from congressional hearings to proposals from the Digital Dollar Foundation to Federal Reserve research and high level political discussions in the U.S. and around the world.
Libra, the digital yuan, and COVID-19 have each challenged policy makers and regulators globally. While Bitcoin and its progeny have been largely ignored to date, global stablecoins (such as Libra) represent a real threat to existing payments infrastructure and a unique opportunity for payment systems to evolve. A broad roll-out of SDCs triggered by the digital yuan and COVID-19 is now gathering speed across the globe. There will clearly be very different approaches depending on domestic and international contexts and circumstances: Major economy CBDCs will have both domestic and global impact while those from developing countries and emerging markets will be more focused on their own territory.
In this context, we argue in our paper that most central banks should focus not on rolling out novel forms of blockchain-based money but rather on transforming their payment systems.
We envisage centralized, decentralized, and hybrid models that can use technology and regulation to combine money and payments. Neither fully private alternative payment systems (APS) nor strictly public SDCs are likely to dominate.
Rather, as with existing payment systems, we expect hybrid models involving partnerships between the public and private sectors to emerge in the wake of the three systemic catalysts. In these structures, monetary arrangements will remain dominated by central banks – particularly those of major economies – with the private sector involved in various payments configurations. This hybrid SDC model will merge monetary and payment systems in many cases, with the greatest potential benefits arising from addressing the challenges of COVID-19 and supporting financial inclusion and sustainable development.
Such a framework could promote globalization by creating a common technological system of money and payments worldwide but could also fragment the global monetary and financial system into competing currency blocks. Unfortunately, the latter appears more likely in the current environment with the potential emergence of a digital yuan, a digital dollar, and perhaps other SDCs.
For most governments, the greatest domestic benefits will be achieved through fast payment systems. However, at the international level, it is clear that the advent of national monetary competition through major economy SDCs will be the defining development of the next decade.
This post comes to us from Douglas W. Arner at the University of Hong Kong – Faculty of Law, Ross P. Buckley at the University of New South Wales – Faculty of Law, Dirk A. Zetzsche at Universite du Luxembourg – Faculty of Law, Economics and Finance, and Heinrich Heine University Dusseldorf – Center for Business & Corporate Law, and Anton N. Didenko at the University of New South Wales – Faculty of Law. It is based on their recent paper, “After Libra, Digital Yuan and COVID-19: Central Bank Digital Currencies and the New World of Money and Payment Systems,” available here.