Global reset – Monetary decoupling (Part 10: CBDC implementation)

Global reset – Monetary decoupling (Part 10: CBDC implementation)

Phuah Eng Chye (23 October 2021)

We have moved from the electronic to the digitalisation phase of a cashless society. The electronic phase mainly converted physical currency into electronic forms and usage. The digitalisation phase will take it up one step further by linking currency with extensive datasets and making it possible to track and program currencies. The speed and scale of digital currency evolution will depend on the willingness of national policy-makers to subject their financial system to information disruption.

In the earlier stages, central banks appeared to have reservations on central bank digital currencies (CBDCs) due to risks from the disintermediation of traditional intermediaries, currency substitution and on prudential oversight and monetary stability. But as the inevitability of digital currencies became obvious, the pace of central bank adoption of CBDC has picked up considerably.

The Bank for International Settlements (BIS) notes two retail CBDCs are live in emerging economies. The Central Bank of The Bahamas (CBoB) launched its Sand Dollar for residents on 20 October 2020. The Sand Dollar is intended for domestic use and to widen financial inclusion. “The CBoB allows holders of a Sand Dollar account to integrate with traditional bank accounts, which can then be used to make cross-border payments using traditional channels. The CBoB further stated that commercial banks remain the only authorised actors for making payments in and out of Bahamian dollars, and the Sand Dollar will hence not affect the capital account restrictions”. The Eastern Caribbean Central Bank (ECCB) launched its retail DCash as a large-scale, year-long pilot in March 2021. DCash allows purchases of goods and services across countries of the Eastern Caribbean Currency Union (ECCU). The ECCB sees crossborder aspects as critical and are having “discussions with other regional central banks regarding the interoperability with other payment systems and platforms to enable remittances and trade in the region”.

The BIS Innovation Hub collaboration with several central banks, renamed mCBDC Bridge project or mBridge, to develop prototype shared platforms for cross-border transactions has progressed smoothly into Phase 3. This “involves further experimentation with design choices and technology trade-offs and a future roadmap from prototype to a production-ready network that can serve the broader central banking community as a public good through open-sourcing”.

In this context, the inefficiencies of legacy correspondent banking networks – its inability to achieve real-time payments – are obvious and ripe for overhaul. There are too many “intermediary steps in the system[1], as correspondent banks are spread out across multiple time zones and different operating hours. This leads to increased operational complexity, possible bottlenecks and duplication…This process complexity also is paired with high FX settlement risk, low transparency and a high reporting burden”. Due to this, correspondent banks have been derisking[2] their cross-border banking relationships over the past decade and this has hurt countries that lost “access to the global financial grid”.

BIS notes “within this frame of mind, central banks have been increasingly experimenting with CBDCs and DLT as the foundation of a new type of payments infrastructure that has the potential to make cross-border payments faster, cheaper, and safer by reducing the risk and burden of intermediary banks…If successful, an efficient, low cost, compliant and scalable multi-currency, multi-jurisdiction arrangement can provide a network of direct central bank collaboration, greatly increasing the potential for international trade flows and cross-border business at large. The benefits of such new payment infrastructure could be even more significant for jurisdictions that currently lack an efficient correspondent banking network”. The BIS innovation hub prototype experiments demonstrate the current 3-5 days lag between payment and settlement for correspondent banking could be shortened to between 2 -10 seconds. In addition, there is potential “to reduce by up to half several core components of correspondent banking costs[3], including nostro-vostro liquidity, treasury operations, compliance and FX”.

Digital yuan implementation

The digital yuan attracts considerable attention due to China’s size and the potential disruption on its own mobile-dominated payment system as well as the international payments network. Ba Shusong, Zhang Daichao and Zhu Yuanqian describes the digital yuan network as being built on a “one coin, two databases, three centers” architecture. One coin refers to the “legal digital currency, that is, an encrypted string representing a certain amount of money issued by the guarantee of the central bank”. The two databases refer to the central bank’s digital currency issuance ledger and the digital currency ledgers maintained by commercial banks locally or on the cloud shared with the central bank. The three centers comprise the certification center (manage identity information), the registration center (track transactions and verify ownership) and the big data analysis center (monitor anti-money laundering and analyse regulatory indicators). The digital yuan operates on a Digital Currency Electronic Payment (DCEP) system with a “two-tier release mechanism” where “the central bank is responsible for the release and withdrawal of digital currency, but the central bank does not directly connect with consumers”. This “can avoid a series of problems such as the renewal of financial infrastructure and financial disintermediation”. It will also adopt a “front-end voluntary, back-end real-name” supervisory approach or controllable anonymization to meet the dual requirements of compliance and anonymity.

James Pang points out an estimated 200 to 300 million Chinese and foreigners without a bank account are currently unable “to enjoy the convenience of e-payment”. The digital yuan can overcome this constraint as “people can conveniently set up a digital wallet even without a bank account, and enjoy the relevant financial services and convenience of e-payment, for true financial inclusion”. Also, “e-payment methods now all require a network connection, without which transactions cannot happen…But a DCEP wallet can work on near field communication (NFC) when there is no network connection…Furthermore, DCEP borrows a lot of innovative ideas from the cryptocurrency area, such as smart contracts and value characteristics. Theoretically, it can provide a better and more flexible user experience than traditional e-payment methods. For example, with smart contracts, we can limit children’s use of DCEP to only purchasing books and toys”.

Jeremy Mark points out “the move to a CBDC was a logical step for a government concerned about maintaining control over a financial system that is rapidly transitioning and periodically facing bouts of instability. Asserting control became an imperative for Beijing as Alibaba and Tencent moved from mobile payments to online banking, investment, insurance, and other financial services…partially inspired by China’s huge state-owned banks, which struggled to compete with the mobile upstarts…The official line on the relationship between the digital yuan and the mobile payment platforms is that the digital currency will be a backup for Alipay and WeChat Pay, especially if the mobile platforms experience technology or financial malfunctions that may have a negative impact on the stability of China’s financial system”. While “the mobile giants have accepted the digital yuan without protest”, anonymously they consider the digital yuan “bad news for all third-party payments companies.”

Robert Greene notes “the e-CNY network’s structure will give the state greater ability to control and monitor financial flows. The e-CNY network could also allow Beijing to curb Ant Group’s and Tencent’s control of important payment rails (the digital infrastructure that moves money from one place to another); in the eyes of many Chinese policymakers, these companies have a track record of flouting government requests for financial data and ignoring regulations…Its success could weaken dominant incumbent payment platforms, enabling policymakers to bring these platforms in closer alignment with Chinese financial regulators’ objectives, such as cracking down on unauthorized cross-border capital flows and bitcoin trading. Payments made via the e-CNY network would provide Chinese state and CCP authorities with troves of data that could be used to block and monitor transactions, which major tech conglomerates have historically resisted handing over…Many large Chinese tech companies partnering with state-owned banks in e-CNY pilots have a financial interest in facilitating consumer use of the e-CNY. This could cut into the lucrative consumer data Alibaba and Tencent can obtain through Alipay and WeChat Pay by reducing these payment platforms’ market share”.

By bring more players into the fray, the digital yuan will improve the bargaining power of merchants, banks and other tech platforms. Takuma Yatsui notes “for stores (payees), DCEP would provide the benefit of shortening their collection periods, because payments are completed (finality) the moment DCEP is delivered as legal tender”. DCEP could thus offer commercial banks “the benefit of directing consumers to their own banking services through mobile payment…by obtaining more touchpoints with consumers. The banks are expected to increase the number of stores and services where DCEP is available, through collaboration with leading Internet services that connect consumers with stores, restaurant chains, etc”. DCEP would also provide other platforms (e.g. ride-hailing, online shopping, food delivery) the opportunity to offer their own payment services.

Takuma Yatsui notes “depending on how the system is designed domestically, DCEP could change the competitive structure of China’s mobile payment market and the revenue structure of private payment service providers”. “The impact of DCEP on Alipay and WeChat Pay will differ significantly, depending on whether DCEP will be available for their payment services, on top of whether payment fees will be charged”. “The PBOC’s Deputy Governor Fan suggested in his 2020 article that the central bank will bear the costs incurred by major state-owned commercial banks providing such public goods as DCEP conversion and wallet opening. If the PBOC’s support results in eliminating payment fees from DCEP, private payment service providers may be forced to waive their fees or lower related expenses. In other countries, if the system design were made advantageous to major state-owned commercial banks and disadvantageous to private payment service providers, it would be criticized as a private sector oppression. Yet, that kind of system design is also possible in China, which has a state-led economic structure”.

Robert Greene notes there is also uncertainty surrounding “how nonbanks such as state-owned telecoms will be involved in the e-CNY network. While e-CNY hardware wallets will be offered by big tech companies, PBOC Deputy Governor Fan Yifei wrote in late 2020 that according to Chinese regulations, only commercial banks can facilitate the purchase of e-CNY…Accordingly, while Zhou Xiaochuan says state-owned telecoms will be part of the network’s lower tier, per Fan Yifei’s comments, these institutions may not actually directly offer the ability to exchange cash or bank deposits for e-CNY. Nevertheless, the expansive presence of state-owned telecoms in rural regions could enable them to target the 20 percent of mainland China’s population that is reportedly unbanked for e-CNY sign up. Yet doing so would likely put the telecoms in competition with smaller rural financial institutions trying to serve these communities…If policymakers do not enable the conversion of deposits at smaller banks into e-CNY but do take major steps to incentivize e-CNY use through promotions, partnerships with state-owned telecoms, and payroll, then the deposit base of already-struggling smaller lenders – which account for a disproportionate share of lending to private small and medium-sized companies – could be harmed as consumers seek to establish relationships with larger banks offering convertibility… Given that many small depositories in China have very troubled balance sheets and, unlike large state-owned banks, are not perceived as too-big-to-fail, it is easy to see how e-CNY could dramatically speed up bank runs by enabling people to take out their money en masse, uninhibited by the frictions brought about by cash withdrawals”.

Pei Sai Fan notes “in March 2021, China paid wages to builders using its digital RMB known as e-CNY in Xiong’an district in Hebei Province. The Xiong’an district government called this China’s first on-chain payments used for wages, which means blockchain technology is used to keep track of and give out builders’ wages. This marks China’s first blockchain plus digital RMB application scenario…it should not be a surprise to see China being one of the first countries to experiment with the instituting of smart monetary policy using programmable money”.

China will leverage on its large economy to accelerate internationalisation of the digital yuan. Miranda Wood notes “for instance, one of the rumored distributors of the CBDC, Alipay, was required to switch to UnionPay for barcode payment clearing. UnionPay is the country’s state-owned card issuer and settlements company, like Visa or Mastercard (but bigger), and has close ties with the PBOC. Payment services by big tech firms, like Alipay, account for 16% of China’s GDP, the highest in the world. If Alipay is indeed a distributor of the currency, then its UnionPay connection would allow China’s central bank to distribute and keep track of it easily. This works both ways because UnionPay also has plans to ramp up international adoption. As of August, UnionPay cards are now accepted in certain stores in South Africa, Australia, New Zealand, Canada, and Russia. French supermarket Carrefour and U.S. giant Wal-Mart also process payments with UnionPay cards. The firm claims its cards can be used in 173 countries and regions. UnionPay additionally issues cards internationally, including in Belt and Road participants Tanzania, Tajikistan, and Laos. While issuing countries and regions only number 54, there is an extensive framework in place for widespread adoption of the Chinese CBDC”. In addition, “China Construction Bank has a platform that has already processed more than $50 billion in transactions. One of the international networks, Voltron, recently piloted a cross border transaction in Renminbi involving HSBC. Using a CBDC for on-chain transaction settlement is the optimal scenario for all players”. Hence, in tandem with its large commercial trade and international projects such as the Belt and Road Initiative, China is capable of building an international digital yuan network to “by­pass the Western banking system.”

Robert Greene notes most USD–denominated, cross-border business-to-business transactions flow through the major correspondent banks in both the seller’s and the buyer’s countries, which in turn route payments through the US-regulated Clearing House Interbank Payments System (CHIPS). He believes “Beijing is also undoubtedly eying the establishment of simpler multi-CBDC arrangements, which could emerge from the streamlining of technical standards for CBDCs globally”. “The global proliferation of CBDCs could give Chinese policymakers what they perceive as the best of both worlds: the opportunity to maintain a slow and steady pace of renminbi internationalization, while decreasing the use of U.S. dollars, SWIFT, and CHIPS for transactions between Chinese firms and businesses in emerging markets”.

Robert Greene argues “Washington must do more to prepare for the risk that China successfully stands up a multi-CBDC arrangement that does not align with U.S. interests but offers a low-cost alternative to existing cross-border payments channels built upon U.S.-regulated intermediaries. Recent bipartisan U.S. legislation introduced to require that the executive branch study the national security implications of China’s CBDC is a positive step in this direction…Additionally, it is important for Washington to engage collaboratively with U.S. allies to ensure that multi-CBDC arrangements are not set up in ways that harm U.S. interests, and U.S. policymakers should seek to better understand how U.S. companies are involved in the development of multi-CBDC arrangements abroad. Efforts to reduce the inefficiencies of existing large-value cross-border payments channels must also be accelerated”.

Challenges for central banks

Digital currencies will be game-changing. In the digital currency revolution, central banks are the main decision-makers that will design the infrastructure and technologies, and make the rules. In particular, there is considerable excitement over the prospect of central banks using CBDCs to extend their direct reach to citizens – bypassing intermediaries and markets.

Ian Shepherd[4] argues “the notion of CBDC-based new monetary policy rests on the radical idea of every individual and business in a country having a bank account with its central bank (the equivalent of the Fed) rather than with a commercial bank…The government could credit payments, including money its central bank simply prints, and debit payments, like for taxes. Monetary policy based on such an account system would allow a government to by-pass having to issue bonds to raise debt in order to spend the bond’s proceeds as they do now.  Any government would simply print money and use it to buy the goods and services it needs or make payments to individuals or businesses”.

However, central banks are likely to avoid having direct relationships with non-regulatees; not so much because they want to protect their intermediaries but more because they would want to protect themselves from the headache of having to deal with millions of customers. Most central banks would prefer to leave these accountabilities with their licensed intermediaries. Most central banks are likely to adopt a Defi (decentralised finance) or DLT (distributed ledger technology) structure similar to China’s DCEP.

Rule-making for digital currencies is a challenging task. Ba Shusong, Zhang Daichao and Zhu Yuanqian notes “at present, there is no unified definition of central bank digital currency (CBDC) in the world”. The rules scoping legality, licensing rules and activities will have a significant impact on the local and global intermediation landscape.

Robert Greene highlights “one major area of uncertainty is the e-CNY’s balance sheet treatment. In 2019, Mu Changchun explained that the e-CNY would be a direct liability of the central bank to the public. This means that from the central bank’s perspective, the e-CNY would have the same balance sheet treatment as paper currency and, to the end user, would represent a direct claim on the central bank. Likewise, a late 2020 central bank report referred to the e-CNY as a retail CBDC, which by definition, means that it represents a direct central bank liability. But in late 2020, and again in spring 2021, Zhou Xiaochuan noted that the e-CNY differs from a CBDC in that it will be a liability on the balance sheet of issuing institutions, not the central bank. These commercial bank liabilities would in turn be backed by central bank liabilities held as assets by the institutions that issue e-CNY (similar to the treatment of Hong Kong dollar banknotes on the balance sheet of an issuing commercial bank). For the e-CNY to become a widespread means of payment, the overall amount of e-CNY issued and available to end users will have to increase significantly. It is hard to imagine this happening without top-level clarity about the e-CNY’s accounting treatment”.

One area being explored is whether CBDCs, with its advantages of traceability using blockchain technology and programmability of self-enforcing smart contracts, can be used to enable central banks to calibrate monetary policy with greater precision. Pei Sai Fan explains “central banks can program digital currency with logic so that the latter can only be spent on a designated purpose. Central banks can accurately control the amount, direction and intensity of liquidity or money supply flowing to the desired industries. This allows various industries to achieve an optimal level of production based on market demand and reduce the risk of inflation or deflation due to under- or over-production. “When central banks issue the currency and commercial banks make a loan, the CBDC disbursed must correspond to the category of the economic entity receiving the loan, otherwise, it will be rendered invalid. With such a system of classified currency issuance and credit creation, central banks can implement targeted monetary policies for different industries with different statutory reserve ratios, interest rate adjustment mechanisms, and liquidity supply mechanisms”. This would allow central banks to “preset conditions to incorporate forward-looking and counter-cyclical features”. Another popular idea is to enable “effective implementation of the negative interest rate policy”.

Pei Sai Fan concludes “the CBDC is an innovative smart currency that will help strengthen the management of market expectation, improve the efficacy of monetary policy transmission, and finally achieve smart monetary policy which brings about efficient resource allocation. On the other hand, with the ability to preset rules, programmable money also increases the central bank’s power to impose more direct administrative intervention and potentially weaken the role of financial intermediaries in directing the circulation of money. It is therefore important for central banks to master a full understanding of economic development and market forces to strike a good and prudent balance between market self-adjusting ability and direct administrative intervention, so as to avoid over-writing preconditions for money circulation and the creation of a mechanised monetary policy“.

The immense possibilities presented by CBDCs comes with risks attached. Central banks can already target loan facilities to control the flow of credit. It is not clear that the advantages will outweigh the complications if these controls are extended to the currency level. In my view, it is intentional that monetary tools should be blunt and aiming for precise calibration could be over-reach. It would be automated central bank central bank micro-management at its worst and will end up replicating the weaknesses of central planning. This is because calibration requires pre-determination, results in rigidity and reduces sensitivity and reactions to changing market conditions. In addition, it always creates possibilities and incentives to game the system. Automation results in tight coupling and policy errors can easily be propagated with inadvertent consequences.

The biggest drawbacks are fragmentation and over-complication from creating too many variations of CBDCs with different embedded “smart contracts” in terms of where and when it can be used or the range of interest rates or incentives. Ian Shepherd[5] explains “a distinctive aspect of CBDC-based new monetary policy is that the money it prints is no longer fungible, meaning one US dollar or Euro isn’t necessarily equivalent to another.  Rather, every unit of CBDC-type money that is issued by a country can have specific rules electronically attached to it. These rules can include: how quickly the money must be spent; on what goods and services it can be spent; which individuals or businesses it can be spent with”.

I think there shouldn’t be too much focus on programming for purposes of monetary policy. The real value of CBDCs lies in its datasets and its potential connectivity with other information datasets. Pei Sai Fan points out “central banks can easily obtain, track and monitor historical transaction data in the entire life cycle of CBDC previously issued. They can accurately assess the speed and velocity of currency circulation, combining it with big data technology in the extensive collection of payment data of social and economic entities. They can further use this information in the analysis of consumption and investment behaviour of the private and public sectors”. The benefits from tracking money flows and real-time monitoring are immense. The central bank would gain better control over money multipliers or trace the source of speculative and illegal flows. Effort should also be made to position it as a channel to distribute funds during a crisis or for welfare purposes.

Another issue being extensively analysed is the impact of digital currencies on financial stability. BIS notes “the financial system is dynamic and evolving and has successfully navigated episodes of structural change over many years”. Nonetheless, “CBDC and certain new forms of digital money could also increase the latent risk of systemic bank runs. This risk is reduced in the existing system through effective banking regulation, deposit insurance, and resolution frameworks…Central banks are exploring safeguards that could be built into any CBDC to address financial stability risks”. “Moderating CBDC take-up would be the most direct route to mitigate the identified risks from the potential substitution of CBDC for bank deposits and relatively low risk assets including money market funds”. Authorities could implement “quantity-based safeguards” by imposing “limits on the transfers and/or holdings of CBDC” and “price-based safeguards (via remuneration or fees) could be used to disincentivise holdings of CBDC or large payments in CBDC (without restricting them). Central banks could consider paying uncompetitive interest rates on CBDC holdings to disincentivise use”. Other measures to influence CBDC adoption or use include “access criteria for permitted users, limits on individuals’ CBDC holdings or transactions, and particular choices around CBDC remuneration”.

The BIS also notes “the presence of a CBDC could, over time, increase diversity of providers of payments and other financial intermediation services. The introduction of a CBDC could make it easier for new financial service providers to enter the market for payments services or to improve the competition amongst banks and non-banks for lending – increasing the diversity of financial service provision. This in turn, subject to appropriate regulation of all participants, could increase the resilience of financial service provision to shocks and reduce the impact of financial crises overall…And to the extent that CBDCs encourage new entrants and the growth of non-bank financial services, authorities would need to ensure appropriate regulation of these entities”.

The BIS predicts “CBDC would likely co-exist with private forms of money in a future financial system that could look very different from that which we observe today…Unlike central banks, issuers of stablecoins are not bound by principles to design products that would co-exist and interoperate with other forms of money or to promote ongoing innovation and efficiency. This could cause fragmentation in a payments ecosystem, just like any other closed-loop payment system. Significant stablecoin adoption and the potential consequent fragmentation could result in excessive market power and the type of deposit disintermediation described as a risk for CBDC issuance, but with lower public benefits”.

Overall, the emergence of CBDCs and other forms of digital currencies herald massive disruption of legacy models for intermediation, commerce and government policies. Central bank decisions on design and rules will have a major impact on reshaping the intermediation landscape and how central banks would manage monetary policy and financial stability risks.

Technlogy, data and geopolitical competition

There are many formidable obstacles to overcome in implementing CBDCs. Ba Shusong, Zhang Daichao and Zhu Yuanqian emphasise it is not government mandates but “a perfect digital ecological environment” that “is the fertile ground for the circulation and prosperity of digital currency”. For example, Ecuador withdrew its digital currency “due to too little circulation to attract enough users”. In this context, “a continuous increase in market enthusiasm and the continuous influx of resources” is needed to expand the digital currency ecosystem. “Both private digital currency and legal digital currency rely on technological paths to expand their performance and application landscape”. “Technology has no physical boundaries…Mutual cooperation between digital currency research institutions is conducive to the research and development of different technical architectures, and it is conducive to the central bank and private digital currency issuers to integrate different technologies, and carefully evaluate the advantages and disadvantages of each optional technology to determine the optimal technology path for digital currency”.

While it is easy to issue CBDCs, many countries have vastly different capabilities and resources in terms of technology, information and connectivity. At the moment, China is moving quickest on the technology front. A NBER report notes “as of early 2020, the PBoC has filed more than 80 patent applications related to digital currency…four categories: digital currency management, circulation and interbank settlement; digital currency wallets; processing payments and deposits; and distributed ledger transactions and technology”. “On the whole, these patents suggest a system under very tight control by the central bank…also place a strong emphasis on compatibility with existing banking infrastructure”. “Alipay, a mobile payment platform established in China by Alibaba, has also filed several patent applications explicitly related to the DC/EP”. While “initially, the PBoC was interested in embracing innovative financial tools, particularly smart contracts and a distributed ledger…However…that interest is tempered by concerns about undermining its cash-like status by supporting smart contracts. Given this tension, the portfolio of patent applications…should be viewed as a spectrum of technologies that the PBoC may someday choose to develop rather than as a preview of the DC/EP at its release”. This includes concepts such as controllable anonymity[6], account control[7], and novel tools such as the use of algorithms to track triggers like loan interest rates to adjust the supply. “They also lay the groundwork for digital currency smartcards and digital wallets that a user can link directly to conventional bank accounts”.

Data privacy is a major concern. Jeremy Mark sees China’s corporate crackdown as part of a broader “drive to develop technologies fuelled by data…to expand the data sources available to the government, because China intends to use AI for everything from military modernization to monetary policy management”. “Digital-yuan users will register with the PBOC under a system described by government officials as controllable anonymity, which will give the government the ability to track illicit transactions and presumably the activities of citizens who attract the attention of security services. At the same time, authorities are changing laws and regulations to gain more access to the vastly larger databases of digital information that Alibaba, WeChat, and many other platform companies have amassed…This is information that will feed the expansion of AI research, which is enshrined as part of a core target of China’s 14th five-year plan…could potentially be used to refine monetary policy to a degree not previously available to central bankers…fine-tune social-control policies”. “Alibaba, WeChat, and other companies have tried to guard mobile-payments data – just as tech conglomerates in the West do. But Beijing has made it clear that commercial secrets will no longer be off limits. The Chinese Communist Party-controlled Global Times put it this way in a recent editorial: “No internet giant is allowed to become a super data base that has more personal data about the Chinese people than the government does, not to mention using the data at its own will.” Broad usage of the digital yuan will provide the Chinese government with a wealth of detailed data about monetary trends, spending, and investment behavior in a society already subjected to an unprecedented degree of official scrutiny. And in the long run, the government’s actions could eliminate the influence of the companies that pioneered China’s digital economy”.

A discussion on digital currencies is thus a debate on the ownership and use of data – among governments; and between governments and private firms. We need to understand the historical context[8] of data privacy issues in the financial industry. Up to the 1970s, banking secrecy was paramount. The subsequent financial liberalisation was accompanied by expanding regulation. Confidentially barriers (of information to governments) were slowly dismantled. Today, financial intermediaries collect and submit volumes of information. In the future, it is likely platforms will not be able to withhold information from their oversight regulators in most countries. The trend favours increasing aggregation of data which would expand the scale and reach of social credit-type systems.

Finally, the international regulation of data and technology has geopolitical implications. Takuma Yatsui argues “China is trying to obtain a (global) standard of CBDC in terms of technology and mechanism, rather than internationalizing the digital yuan itself”. “The PBOC is likely to establish a technological advantage in CBCDs first” as a prelude to exporting the technology and mechanism to emerging countries. CBDCs can allow emerging countries to leapfrog technological challenges to address issues “such as greater payment safety and convenience and financial inclusion”. However, technological superiority alone may not be sufficient to win over emerging countries due to privacy protection concerns and the lack of a comparable (to China) state-driven economic system. “Moreover, the introduction of the Chinese CBDC model into those countries could also risk worsening those countries’ relations with the US, as financial and technological conflicts between the US and China continue to deepen. The international acceptance of China’s DCEP mechanism and technology is an interesting question and will serve as useful material in deliberating over the universality and specificity of the China model”.

In addition, Ian Shepherd[9] notes “CBDC-based monetary policy would be completely different to current monetary policy, in which the U.S. dollar’s status as reserve currency”. “If a CBDC-based monetary policy was implemented by China, Japan and/or the Eurozone, it could reduce their exposure to the US dollar and weaken its unique role as the global reserve currency. And, the US, as the dominant even monopoly player may be slow to react to the attacker’s advantage. Ironically, the U.S. might also be constrained by hundreds of existing US patents, many of which owned by inventors/assignees that are not U.S. entities.”

The US has notably been ambivalent on its CBDC and cryptocurrency ambitions. This stems from the fact that the USD is the dominant currency in the legacy system and has the most to lose. In the past, the US has stopped the use of cryptocurrencies to bypass its sanctions; e.g. threatening to extend sanctions “against any entity or person supporting Iran in the development of its national cryptocurrency, or even facilitating its adoption”[10]. But with many countries, especially China, launching their own CBDCs, the US may be forced into adopting the risky strategy of launching a digital USD to cannibalise its own market with the idea of minimising the loss of market share to other countries.

Gillian Tett notes the “Boston Fed asked researchers at MIT to embark on a project to build and test with boldness [and] ingenuity the computing systems needed to support a US-backed digital currency”. There were several interesting aspects. “First, the Hamilton team is not just adapting existing private sector crypto technology – as the Monetary Authority of Singapore is doing with ethereum, say. Instead it is building an entirely new system from scratch. Second, after the Fed releases a white paper that will document the ability to meet reasonable goals with core processing, it will create an open source licence for the code…US officials appear to hope that if their code is copied, it will improve it and – most crucially – give the US more influence over global standard setting. Third, the MIT team is focused on retail finance and driven by a desire to find a solution for mass-market digital money that is scaleable, secure, speedy and flexible enough to evolve over time”. Some challenges in designing a CBDC includes “Can a retail CBDC system adequately trace transactions, limit the loss or support the recovery of lost funds without compromising user identity? And, can a retail CBDC be flexible yet robust? No private sector money system has squared those circles yet in a credible way”.


Digital currencies are major game-changers for central banks, financial intermediaries, the economy and society. Physical currency would be largely phased out. CBDCs will have powerful effects because of their legal backing, information bundles and programmable features. It is important that CBDC systems be organised to maximise the value of information. If CBDCs don’t use information well, then they will just represent a slightly efficient form of money.

The transformative effects will take shape over decades. The combination of non-financial and financial effects is pervasive and will change the balance of power among suppliers, employees, customers, competitors, platforms and governments. The main obstacles to progress are not technological but are regulatory and political in nature. The rules framework for both CBDCs and cryptocurrencies is destined to undergo many iterations. Digital currencies will undoubtedly create opportunities but it will also destroy legacy financial arrangements. Therefore, there will be fierce resistance from legacy players defending their turf. The challenge is whether governments and regulators are up to the challenge of managing the disruption of their core legacy financial institutions and their impact on the economy and society.


Alessandro Arduino (7 September 2020) “Cryptocurrency: the next battleground in the US-China rivalry”. SCMP.

Bank of International Settlement (BIS) (23 June 2021) “Annual economic report 2021: Chapter III. CBDCs: An opportunity for the monetary system”.

Bank for International Settlements (BIS) (July 2021) “Report to the G20 – Central bank digital currencies for cross-border payments”. file:///C:/Users/user/Downloads/PPEA2021048.pdf

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Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.

Phuah Eng Chye (29 February 2020) “The journey from privacy to transparency”.

Phuah Eng Chye (7 November 2020) “Information rules (Part 1: Law, code and changing rules of the game)”.

Phuah Eng Chye (5 June 2021) “Global reset – Two whales in a pond”.

Phuah Eng Chye (19 June 2021) “Global reset – Monetary decoupling (Part 1: Sterilisation and QE)”.

Phuah Eng Chye (3 July 2021) “Global reset – Monetary decoupling (Part 2: Economics of large central bank balance sheets)”.

Phuah Eng Chye (17 July 2021) “Global reset – Monetary decoupling (Part 3: Consequences of diverging policies)”.

Phuah Eng Chye (31 July 2021) “Global reset – Monetary decoupling (Part 4: Lessons from Plaza Accord)”.

Phuah Eng Chye (14 August 2021) “Global reset – Monetary decoupling (Part 5: The end of USD supremacy – Will it be different this time?)”

Phuah Eng Chye (28 August 2021) “Global reset – Monetary decoupling (Part 6: The forthcoming currency war)”.

Phuah Eng Chye (11 September 2021) “Global reset – Monetary decoupling (Part 7: Currency wargame scenarios)”.

Phuah Eng Chye (25 September 2021) “Global reset – Monetary decoupling (Part 8: Sovereign digital currencies and networks in the currency war)”.

Phuah Eng Chye (9 October 2021) “Global reset – Monetary decoupling (Part 9: Information perspectives on digital currencies)”.

Robert Greene (1 July 2021) “What will be the impact of China’s state-sponsored digital currency?” Carnegie Endowment.

Robert Greene (6 October 2021) “Beijing’s global ambitions for Central Bank Digital Currencies are growing clearer”. Carnegie Endowment.

Takuma Yatsui (20 November 2020) “implications of China’s digital yuan initiative – potential impact and future focal points”. Mitsui & Co. Global Strategic Studies Institute.

William F. Meehan III (21 October 2020) “Can the Federal Reserve print money forever? Or, how continuing to print money to support deficit spending may end badly, with China’s help”. Forbes.

[1] BIS explains while messages and payments within SWIFT can be cleared within 24 hours, “an average cross-border transaction could experience half to a full day delay at each intermediary correspondent bank. When taking into account manual processing, compliance checking, differences in time zones and operating hours for local settlement networks, the time between payment messages and settlement can often take up to 3-5 days. The correspondent banking model often presents further uncontrollable delays due to cross-border sanctions related follow-ups, frequent internal investigations, and dispute resolutions”.

[2] BIS explains “derisking occurs when global banks stop providing international payment services such as wire transfers, credit card settlements, and even hard currency to a country’s local banks”. Derisking was triggered by rising compliance costs required to prevent “seemingly routine cross-border payments disguising money laundering, terrorism financing, tax evasion, and corruption proceeds” as well as for the enforcement of economic and trade sanctions. “The necessary compliance structure can be so costly that correspondent banking, a large-scale low-margin service, could stop being profitable”.

[3] The BIS notes “the average retail payment cost ranges from below 2% in Europe to over 7% in Latin America, while the average global cost of sending remittances is 6.38% of the amount sent…transaction costs for a multi-million-dollar payment could be as low as 1%”.

[4] See William F. Meehan III.

[5] See William F. Meehan III.

[6] To provide users some degree of anonymity with respect to other users but not necessarily from thier financial institution “Banks, however, have a mechanism to deanonymize suspicious transactions, in order to combat money laundering and the financing of terrorism”. See NBER report.

[7] An Aliplay patent application describes a command-and-control architecture in which regulators can directly, instantaneously, and unilaterally freeze users’ funds. See NBER report.

[8] “The journey from privacy to transparency”.

[9] See William F. Meehan III.

[10] See Alessandro Arduino.