Today, we’re on the precipice of what could be the largest
transformational period in global history. With the first Industrial
Revolution, new technologies like assembly lines, factories and transportation
fundamentally changed society. This time, instead of cogwheels doing the work,
blockchain-based digitalization will continue to drive transactions.
Specifically, this latest phase of progress has its sights set on a massive
industry ripe for disruption: finance.
Digital finance and the monetary system is leveraging
decentralized blockchain technology to modernize financial markets. Dominant
players in these systems include the world’s biggest financial institutions and
global central banks.
The rise of digital currencies and CBDCs
As tokenization is an inevitable trend, central bank digital
currencies (CBDC) are surging in adoption, since they are simply one kind of a
more generalized digital asset, albeit one that is bound to risk-free central
bank money. The global rivalry in digital currencies is heating up as central
banks from an increasingly wider swath of countries, including China, Hong
Kong, Thailand, the EU, U.K., U.S., and Australia, explore potential use cases
for tokenized money.
CBDC is the first place where we see top-down adoption of
distributed ledger technology (DLT) from central banks and governments. The
adoption of CBDCs will drive significant DLT ecosystem innovation and
development that will impact financial organizations. The widespread adoption
of DLT will extend beyond finance to other industry verticals like security,
supply chains, healthcare, retail and ecommerce.
CBDCs will certainly make payments, settlement of deals and
trading simpler, especially when it comes to global trade. It will also
potentially change the role current institutions are playing regarding money
and payments. CBDC implementation will also possibly make cross border payments
simpler and much cheaper. One result of that will be the enablement of
micropayments, allowing small businesses to be more competitive and eliminate
the need for aggregators in order to make them economically viable, resulting
in a different distribution of value.
Winners and losers are made from historic periods of
societal shifts and advancements. The U.S. was obviously a dominant force
during the first revolution. As the world embarks on a new transformational
journey, who is driving it? The answer to this question is very complex and
currently unclear, but there is an intense financial technology “arms race”
brewing between the world’s superpowers for dominance in digital finance
infrastructure and technology, spurring short-term competitive innovation with
critical long-term implications.
“I believe that if America does not lead innovation in the
digital currency and payments area, others will,” David Marcus, head of Diem,
the cryptocurrency project founded out of Facebook, said in a statement to the
U.S. Senate Committee on Banking, Housing and Urban Affairs.
Huw van Steenis of UBS said there will be a “three-horse
race” around the future of money with private tokens and CBDCs developing in
parallel with efforts to improve the current system. The implications of
winning or losing the digital finance “arms race” are massive and far-reaching.
During the U.S. and USSR space race, NASA harnessed
tremendous intellectual and technical capital to enable the moon landing and
further space exploration, leading to a variety of spinoff inventions, from
global positioning systems (GPS) to advances in flight technology to Velcro and
even freeze-dried food. In the same way, blockchain-based digital finance
technology is a means to the end of greater technological sophistication.
The three leaders in the digital currency arms race
More than 80% of the world’s central banks are exploring
their own versions of digital currencies, but it’s China, the U.S. and the EU
that have the resources, technology and infrastructure to determine the future
of the digital economy. 2020 started with a major event within the financial
world: the World Economic Forum in Davos, where the WEF released a toolkit for
policymakers regarding the creation of CBDCs.
China
China is currently testing its digital yuan with a feature
allowing people to send money to each other by simply touching their
smartphones together. This particular effort is just one of many digital
currency trials China is conducting across the country. These coordinated
activities, in combination with their leadership in the crypto ecosystem
(accounting for nearly 90% of trading volumes and hosting two-thirds of bitcoin
mining operations), is giving China somewhat of an advantage.
Leveraging that first-mover advantage, China has ambitious
plans to leverage U.S. innovation and its own digital currency to someday
dominate other world currencies. As a purely aspirational endeavor, the jury is
still out on whether they can actually achieve this goal.
Regardless, China is
creating a significant advantage in this global race on CBDCs by investing in
the technology and experimenting at a very fast pace. Even in the most isolated
and underdeveloped areas, most people already use electronic forms of payment,
like WeChat Pay, almost exclusively. We will continue to see advancement from
China with regards to the digital yuan, where it’s currently enjoying a
first-mover advantage over other digital currencies.
China has made the digital yuan a public priority, and it
has an ambitious goal of competing with the U.S. dollar by creating a digital
Asian alternative. China will be able to track and control the movement of
money in and out of the country, which is much easier to do with a digital
yuan. Given its political structure, China is able to move faster than the U.S.
or Europe in implementing such changes.
Europe
Europe is in a strong position to create a CBDC, but unlike
attempts by smaller, individual countries like Sweden, the size and scale of an
EU digital currency would be sustainable long-term and could compete at scale.
The European Central Bank is discussing launching a consideration phase for a
digital euro this year and launching a digital euro is at least a five-year
plan.
United States
The U.S. continues to lead in the innovation, regulation and
implementation of blockchain-based digital securities, banking, payments,
insurance, etc., but may not be as far along as others when it comes to CBDCs.
Over the last decade, American innovators have built compelling innovations in
blockchain, digital currency and cryptocurrency aimed at revolutionizing
finance and creating new US tech superstars. And, as these technologies
advance, they’re innovating industries beyond just finance, including retail,
cybersecurity, supply chain management and so many more.
Tech leaders in the space like Securitize are paving the way
for widespread adoption and access to liquidity by building the mechanisms for
the industry to take hold. The benefits of CBDCs will propel the U.S.
implementation of a digital dollar. The release of CBDC is not just a technical
change, but it’s also the revamp of a financial system that is centuries old.
US policymakers should continue to foster US leadership in technological
financial innovation and ensure that the American people enjoy its benefits
first.
“The United States usually wins when we unleash the power of
our innovative, dynamic private sector, with the government setting the rules
rather than building the products,” said Brian Brooks, former acting
comptroller of the currency of the U.S. Treasury Department’s Office of the
Comptroller of the Currency. “But either way, given the intense focus of other
countries in this area, let me say that because of the important role of the US
dollar, we need the United States to step forward on this field.”
The future of finance
What happens with CBDCs will have far-reaching implications
on the future of digital finance, including cryptocurrency and digital
securities. Much like the space race didn’t just put a man on the moon, but
also catapulted the invention of important ancillary technologies, CBDC and DLT
adoption will influence the forward-moving progress of every industry. There
will be an exponential amount of innovations resulting from this digital
finance arms race that we don’t even know about yet. The possibilities are endless
and we’re just at the starting line.
Whoever leads this race and determines the outcome of its
infrastructure and operation will most certainly gain a significant advantage
and may have the possibility to spearhead many of the other innovations that
come from this technology. The conversation of this tech competition between
countries was even brought to the US Senate. China is far ahead in implementing
real digital finance and currency programs as we speak, giving them a
first-mover advantage in something as simple as experience.
The US and its regulatory bodies are still the gold standard
and will ultimately set the pace and the rules. US-based innovators continue to
roll out viable solutions, but which powerhouse will roll out the standard
solutions first to control the space and our digital economic destiny?
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