Central Banks Attack Bitcoin, Praise CBDCs

Industry leaders shared their thoughts on CBDCs

The BIS report states that stablecoins are no game-changer within the industry as they have the potential to fragment the liquidity of the monetary system.

Industry leaders shared their thoughts on CBDCs

The Bank for International Settlements has backed the development of central bank digital currencies (CBDC) in the fight against Big Tech and Bitcoin.

The growing attention toward Bitcoin et al, as well as stablecoins and Big Tech’s general involvement in the financial services industry has raised concerns among the banking and settlement authorities. Amazon and Facebook are also involved in crypto projects of their own.

Hyun Song Shin, head of research and economic advisor at BIS, said: “By now, it is clear that cryptocurrencies are speculative assets rather than money, and in many cases are used to facilitate money laundering, ransomware attacks and other financial crimes. Bitcoin in particular has few redeeming public interest attributes when also considering its wasteful energy footprint.”

The BIS report states that stablecoins are no game-changer within the industry as they have the potential to fragment the liquidity of the monetary system.

In regard to Big Tech, their “anti-competitive practices that exclude competitors in associated digital services” raise red flags. “This concentration of market power is a reason why authorities in some economies are increasingly turning to an entity-based approach to regulating Big Techs, as a complement to the existing activities-based approach”, said Mr. Song Shin.

CBDCs, on the other hand, are built on central banks’ traditional roles in the payment system and ensure finality, certainty, liquidity, and a level playing field.

“They open a new chapter for the monetary system by providing a technologically advanced representation of central bank money. In doing so, they preserve the core features of money that only the central bank can provide, anchored in the foundation of trust in the central bank”, he said in the BIS report.

BIS points to a two-tier system as the way to go: central banks operate the core, while banks and payment service providers develop innovative use cases.

Digital identity is crucial in a well-designed CBDC as it would require users to identify themselves to access funds and would protect users against the abuse of personal data.

Industry leaders shared their thoughts on CBDCs

Industry leaders shared their thoughts on CBDCs

Nick Ogden, the renowned serial pioneer founder of Worldpay and RTGS, commented on a Finextra discussion: “The impact of CBDC’s in the wholesale interbank money market is instantaneously significant. Had this option existed in 2006, the impacts of the Global Financial Crisis could well have been diminished.”

Joan McGowan, Global Banking Industry Principal at SAS, said that CBDCs “would inherently bypass banks, lenders (that’s the purpose – it owns the network). Deposits and digital money will sit in the central bank vaults with access through an app such as Venmo or maybe even a central bank app – who cares it’s a front end only.

“Because China is driving their e-yuan (500,000 users) other countries cannot afford to abstain. As DCs are networks they do not stop at geographical or currency borders.

“On the plus side, CBDCs will cut the cost of managing money and provide easier access to 1.7 billion underbanked. But the level of intimate intelligence a govt will have on your finances is scary. They will be the ones to make credit allocation decisions and, moreover, it’s not implausible to imagine a govt fining you and garnishing your salary for that parking fine. But by far the most ominous threat is a cyber attack on a digital currency. The network goes down but the banks no longer hold the cash. Lots to think about”, she added.

Graham Smith, Managing Director at Volopa, replied to Ms. McGowan remarks: “The assumption that the CBDC would bypass banks and lenders suggests there are not the requisite checks, balances, segregation, or thoroughly thought through model in place. This would leave the CB totally exposed and vulnerable without the layered system below and cannot be the way forward.

“I can’t see the govt being interested in the coffee I’ve just purchased, any more than they are today. But if they wanted to, they could go to my Bank and see everything I do digitally today to assess the level of parking fine. They don’t even need to go to the Bank, HMRC has it all at their fingertips”, he continued.

“I completely agree that a cyber attack is the most likely and damaging threat, which is why the strengths of the existing cash and banking environment should be learnt from and built upon to prevent a massive impact from an attack and to immediately identify any issues arising.

“We have to assume that such an attack would happen; enabling the requisite digital vault doors to be slammed shut is a must-have upon detection, as is a digital sprinkler system to handle the digital equivalent of a fire at the Royal Mint. The list goes on and all the brains applying themselves to the CBDC opportunity must prepare to expect the unexpected, whilst building something that can bring so much value and opportunity, including securely enabling the underbanked”, Mr. Smith added.

“The bank level segregation could be enhanced so each bank can identify the DC it has received from the BoE, also what it and its clients have touched. What an incentive for the CB to encourage a greater number of regulated entities (banks, fintechs etc), to help control/monitor the flow of funds at their level with their fingerprint on it.

“The opportunity in the digital world for CDBC to provide clear visibility of money paths, origin, destination could seriously damage current fraudsters. This has to be a prime benefit, ultimately affecting all of us, whilst also making it easier and safer for the average Joe to do what they do today”.

Industry leaders shared their thoughts on CBDCs

CBDC projects are maturing and fast

The involvement of central banks in the world of digital currencies is likely to raise concern and applause for years to come as they set up guidelines, prototypes, and pilots, before going live with a CBDC.

The American bankers lobby, ABA, has recently warned lawmakers about real-world trade-offs that could significantly reshape the banking system in a world of CBDCs.

The defensive stance comes in a year that already saw the Eastern Caribbean going live with its own CBDC. and many countries have announced development programs for their sovereign digital currencies.

Brazil has recently announced the guidelines for the potential development of a CBDC after launching a working group in 2020.

The European Central Bank is pursuing a digital euro within the next five years. ECB’s Panetta has proposed a plan that limits each citizen’s wallet to €3,000.

A recent PwC report pointed to the top 10 most developed retail CBDC projects, with Bahamas taking the first prize, followed by Cambodia, China, Ukraine, Uruguay, and Ecuador. The Eastern Caribbean is placed in 7th, followed by Sweden, South Korea, and Turkey.

On the interbank level, Thailand is at the forefront, followed by Hong Kong, Singapore, Canada, UK, France, South Africa, Europe, UAE, and Japan.

R3’s Corda was the most popular blockchain technology for CBDCs – especially on the wholesale side – but much has changed in the last 18 months as retail CBDCs are under the spotlight and almost every blockchain company has claimed an interest.

Ripple has announced a private version of its XRP Ledger and seems to have conquered the interest of France and possibly Brazil. The firm, however, might be sidelined for its ongoing legal battle against the SEC.

Tezos, however, seems to have been used in French CBDC experiments already and ConsenSys is participating in a few pilots using Ethereum, with Hedera also in the CBDC race.

The Bank of International Settlements is owned by 63 central banks and serves as bank for central banks. One June 23, 2021, the BIS released one chapter of its full annual report, which will be released on June 29. From the title of the chapter, “CBDCs: An Opportunity for the Monetary System,” it is apparent that the BIS is very much in favor of CBDCs (central bank digital currencies) — not very surprising considering the makeup of the BIS. But along the way, the BIS also made clear its negative views of cryptocurrencies. It wrote:

By now, it is clear that cryptocurrencies are speculative assets rather than money, and in many cases are used to facilitate money laundering, ransomware attacks and other financial crimes. Bitcoin in particular has few redeeming public interest attributes when also considering its wasteful energy footprint.

This last point referred to the oft-cited metric that the estimated annualized electricity consumption of the Bitcoin network is roughly the same as that of the Netherlands. As to stablecoins, the BIS was not as negative, but only slightly so. The chapter explained that they are an attempt to import credibility by being backed by real currencies, but then noted that stablecoins are nevertheless only as good as the governance behind the promise of the backing. In the view of the BIS, “cryptocurrencies, stablecoins and the walled garden ecosystems of big techs all tend to work against the public good element that underpins the payment system.”

The chapter includes analyses on:

  • The architecture of CBDCs and how they would fit into the financial ecosystem;
  • The international dimension of CBDC issuance and the implications for cross-border payments;
  • Project Helvetia, which demonstrated the feasibility of integrating tokenised assets and central bank money;
  • Application programming interfaces and how they could act as a bridge between different providers and simplify transactions.

In touting the benefits of CBDCs, the BIS also lays out the design choices for CBDCs, which, alongside cash, would be issued and backed by a central bank. BIS analysis finds that CBDCs would best function as part of a two-tier system where the central bank and the private sector work together to do what each does well, with the central bank operating the core of the system to ensure its safety and efficiency. The BIS says the most promising CBDC design would be one tied to a digital identity, requiring users to identify themselves to access funds. The BIS’s head of research, Hyun Song Shin, is quoted as saying that CBDCs “preserve the core features of money that only the central bank can provide, anchored in the foundation of trust in the central bank.”

Of course, the BIS statements in the previous paragraph that place the central bank at the center of the virtual currency universe encapsulate the very “us vs them” mentality that is at the core of so many Bitcoin true believers. They specifically sought out a currency that is beyond the control of any government or central bank. And, the pseudonymous nature of the blockchain transactions is yet another reason why many in the crypto crowd will disagree with the views of the central banks. In the 24 hours after the release of the BIS chapter, Bitcoin was up by a double-digit percentage.