Here’s a first take on the fast-growing central bank digital currency market, as the mainstream tries to compete with and subsume cryptocurrencies within the established system.
Baroness Susan Kramer, former LibDem Treasury spokesperson, notes the growth of CBDCs and argues that “there’s a gathering momentum behind fiat digital currencies. China is among the leading countries in this area. It seems to be looking to establish itself and its CBDC as the international standard. Whatever its reasons and purposes for doing this, there are many elsewhere in the world who would not see this as a desirable or acceptable move.”
China is seen as the leader in the race to develop a workable CBDC by market commentators such as Reuters, which reported in mid-April  on the further expansion of the virtual yuan to cities beyond the 2020 roll-out to Suzhou, Shenzhen, Chengdu and Xiong’an. The underlying purpose of CBDCs can be seen as an attempt to streamline the existing financial system. But CBDCs are clearly designed to occupy the territory – and neutralise the threat – of permissionless, decentralized cryptocurrencies, with Bitcoin, as ever, leading the charge.
“Gauging popular sentiment worldwide, many consumers seem to be happy for their governments to launch a CBDC,” says Susan Kramer, “but not in the US, where the citizens display a lack of trust in in their own government. In Asia, individuals seem far less concerned. That may be because many of them are living under what are basically authoritarian regimes. There’s no doubt we’re entering a fascinating time in the area of cryptocurrencies and CBDCs.”
Kramer’s point about authoritarian regimes is well made. The unifying factor for cryptocurrency supporters is a profound dislike and distrust of centrally controlled systems, as the preceding article in this short series made clear. Purists regard CBDCs as digital, but not cryptocurrencies in a true sense in that they are neither decentralised nor permissionless; CBDCs operate on the permission, or fiat, of a central authority.
Perhaps the Russians citizenry will be happy with the Bank of Russia’s proposals to build a prototype digital ruble by the end of the year. Local banks will be able to create and open electronic wallets for consumers and to execute value transfers between these wallets on the digital ruble platform operated by the central bank. This is almost exactly how the Chinese operate their own fledgling system.
The Swedes have announced something similar (though the Riksbank’s implementation will be behind Russia’s timetable) and there’s an even slower-moving digital currency initiative from the European Union.
“A really interesting question is how many people might want to use a sterling-based CBDC,” says Kramer. “Given the competition from other governments and pure cryptocurrency plays, it might be that the only hope for a success here would be to be the first mover.”
Given the recent announcement from the Chancellor of the Exchequer, it looks as though the current administration is going for a green marketing edge. Whether investors will buy into a system that is the antithesis of the cash economy, with every single transaction perfectly visible to the central authority controlling the digital ledger, remains to be seen.
The financial establishment is understandably worried about Cryptoland. Truly opaque, independent value-exchange systems outside its control deprive central government of revenue, and weaken the nation state’s finances and its ability to monitor and manage its citizens. It’s small wonder then that the mainstream is attempting to bring Cryptoland into the mainstream through regulation, legislation or offering CBDCs as decoy, faux-cryptocurrencies.
There does however remain one hope for the idealists. Decentralised Finance (DeFi) is all about the maths and the independence of the algorithm. And, of course, like all last hopes, there are those who will seek to use it as a marketing opportunity.