We have gotten a number of questions about what digital currencies mean, so below is a brief primer on their current status and potential impact. While this topic may seem wonky today, we will all at some point in the next few years likely have the option of a digital currency account so you may as well spend 400 seconds to learn the lay of the land today.
First, drawing from statements from Jerome Powell, JPM CEO Jamie Dimon, and Bank of Israeli Deputy Finance Governor Andrew Abir, we know the following important items:
- Motivated by Chinese Progress: The US effort stems in part in response to Chinese efforts toward a digital yuan. Some will read into this a desire to promote reserve currency stability, and they are probably right – there is no obvious reason to give the Yuan a leg up on transferability.
- E-CNY, an early digital yuan, seems flimsy: The Chinese government has approved a “digital yuan”, the E-CNY, which has mis-spellings on its English website and is “backed by banks” including bank loans and in general does not appear particularly compelling from this author’s view: Why Use Digital Yuan – Digital Yuan: A Step of Cashless Society! (ecnydigitalyuan.com)
- Banking appears safe: Powell wants a digital dollar to complement existing monetary systems, rather than replace them. He has been very clear on this, for good reason – it helps avoid depressionary deflation or bank runs in times of stress.
- Broad distribution for lower income: Powell wants to help reach the unbanked. Ironically, markets seem to be ahead of government planners – just in the last 3-6 months a massive “neobank” expansion has helped accomplish this.
- Payment system infrastructure: Abir has already tested and developed Israel’s own digital currency, but does not see it as particularly compelling; rather he sees it as a way to improve payment system infrastructure.
- No clear broad advantages: CBDCs are not particularly sexy in the way the market imagined Bitcoin to be earlier this year – they are centralized; they disclose your information, they are tied to diluting fiat, and their blockchain exists but may as well be an automatically updating excel spreadsheet in the Pentagon because there is no point to its encryption given the centralization. The only apparent benefit is lower transfer costs, particularly for those outside the banking system.
- The major risk: If any central bank oversells a digital currency, or presents it in competition with its deposit system, it will encourage savers to rush to that digital currency in times of crisis, which in turn depletes its banking system and could engender a September 2008 situation.
The source document links for the above conclusions are at the end of this post.
With that said, below are a few early extrapolations from such programs:
Who might win?
- Immigrants and others making frequent transmissions, to the degree adoption grows into a lower-cost form of monetary transmission, with a central authority handling the blockchain. For example in El Salvador, rather than adopt a somewhat cumbersome mechanism like bitcoin, may have attempted its own digital currency, or at least adopted a stablecoin or other token on ETH rails to reduce remittance costs.
- Incumbent politicians, to the degree a digital currency is used or abused for expedited cash transfers during downturns.
- Lower income consumers and the broad set of civilians currently stuck with GreenDot, EasyMoney et al., going to Wal Mart and paying fees in order to transact.
Who might lose?
- Payment networks – Paypal, Square, several banks, and several processors currently attempting to grow share may find CBDCs as a competitor on the margin. While nothing is clear and there is almost zero chance the Federal Reserve oversees any payments functionality, a digital currency may at very least a pressure transfer pricing and the ecosystem built around it.
- Some stablecoins – to the degree they are used for payments or other applications. Why use tether to send funds over a CBDC unless restrictions are in place?
- Sound money – there is clear potential to abuse a CBDC to the degree central banks and governments follow the recent paradigm of working in concert with governments to print and distribute money at the earliest signs of economic distress.
Is there a trade around this?
There is a broad ecosystem of financial vendors currently serving the poor in America. When stimulus payments or tax refunds hit are paid, this group, to include refund lenders, debit and prepaid card providers, and check cashers, profits by the tens of billions. A digital currency, used on the margin akin to how the average American uses Paypal or Venmo, could have cut that out entirely.