Governments Exploring Digital Currencies: Is the U.S. Lagging Behind?
Cryptocurrency and digital assets have taken the world by storm, but governments have been slow to act. What is the future of DeFi in the US?
Originally published on Zinvest: zvstus.com/blog/governments-exploring-digital-currencies-cbdc-crypto
Cryptocurrencies, like Bitcoin, have certainly gained value over the years, but world governments are not so quick to trust them. Instead, many are exploring central bank digital currencies (CBDCs).
CBDCs are managed and legitimized by the national bank and allows the less fortunate better access to more modern, digitized banking systems — including convenience and security. They can eliminate fees and lower the overall cost of banking while providing a simpler and faster way for immigrants to send funds to their families back home.
This also allows those who can’t afford to be in the banking system to participate in the internet-based economy rather than solely relying on physical cash. However, CBDCs are still susceptible to hacking and privacy breaches.
They are also centralized, considering that they are legal tender minted by a central bank — an obvious difference compared to cryptocurrencies that take pride in being decentralized.
The number of countries experimenting with CBDCs more than doubled during the pandemic from 35 countries in 2020 to now 81 countries. Currently, only five countries have officially established digital currencies nationwide: the Bahamas, Antigua, Saint Kitts, Saint Lucia, and Grenada.
Along with China, 14 other countries are running pilot projects for a new digital currency.
China Pioneers Their Own Digital Currency: The Digital Yuan
In April 2020, China unveiled its pilot of the digital yuan, also known as e-CNY or e-RMB, and became the first major economy to do so. It is a major effort from China (and the People’s Bank of China) to curb the enthusiasm around Bitcoin and other virtual currencies while driving interest towards digital currency.
The digital yuan, sometimes referred to as the “Chinese crypto,” aims to replace physical cash and allows users to exchange their money for the new digital currency. Chinese officials claim that the digital yuan has “controllable anonymity” with protections to prevent illegal activity.
With more than $5 billion in digital yuan transactions, China plans to test its new currency with foreigners during the 2022 Beijing Winter Olympic Games. Depending on its success and pace of development, the digital yuan can potentially be adopted in 2023 or 2024.
China Bans Crypto — Bitcoin & Digital Tokens
The ban comes as a huge update to the crypto trading scene. According to an announcement published online Monday, Alibaba, China’s largest online retailer, will stop selling cryptocurrency mining machines (“crypto-mining”). China’s crypto crackdown comes after the Chinese government made its sweeping announcement on Friday banning all cryptocurrency trading in the country.
The new ban, first reported in English-language media by Coindesk, is “getting attention for its prohibition of the sales of crypto-mining machines” and other facets of crypto, including the currencies themselves and other crypto-related transactions. This also affects crypto exchanges that were doing businesses directly with Chinese citizens.
According to the retailing giant, the ban will take effect on October 8, though third-party sellers won’t face serious consequences for breaking the rules until October 15.
The U.S. Government’s Current Stance on Crypto
Compared to other governments experimenting or testing their pilots, the U.S. has been slow in its approach to CBDCs. The hesitance most likely stems from the fact that the USD makes up more than 60% of the global foreign exchange reserves.
However, with countries like China pushing forward with their own plans, concerns have arisen about the USD being challenged. The Federal Reserve is currently conducting its study on CBDCs and is evaluating whether to launch its digital currency. It is expected that they will be releasing a paper on the issue soon.
Chairman Jerome Powell has mentioned that the Fed does not feel pressured to rush with CBDCs and stated, “I think it’s important that we get to a place where we can make an informed decision about this and do so expeditiously. I don’t think we’re behind. I think it’s more important to do this right than to do it fast.”
Crypto Mining Coming to the US
China’s ban on crypto-mining has forced bitcoin entrepreneurs to flee overseas. Many are heading to Texas, which is quickly becoming the next global cryptocurrency capital.
When China announced a crackdown on bitcoin mining and other crypto-related services in May, and Kevin Pan, CEO of Chinese cryptocurrency mining company Poolin, got on a flight the next day to leave the country. “We decided to move out, once [and] for all. [We’ll] never come back again,” Mr. Pan told the BBC.
Headquartered in Hong Kong, Poolin is the second-largest bitcoin mining network in the world, with most of its operations in mainland China. The country was home to around 70% of global bitcoin mining power until the clampdown sent crypto prices into a tailspin and caught miners off guard.
These “bitcoin refugees” are now urgently scrambling to find a new home where they can, digging for properties in neighboring Kazakhstan, Russia, or North America for more opportunities at crypto transactions.
For bitcoin miners, time is literally money: “We had to find a new location for the [bitcoin mining] machines,” says Alejandro De La Torres, Vice President at Poolin. “Because every minute that the machine is not on, it’s not making money.”
While the Federal Reserve has not taken an exact position on a digital currency, many other countries are exploring their own CBDCs, and people can’t help but wonder: is the U.S. being outpaced?
The Shift from Physical to Digital: What Other Governments are Doing
We’ve all seen it in the way our world has modernized and moved forward with technology. Similar to physical brick-and-mortar stores shifting to online stores, advanced society has changed the way we pay.
CBDCs operate just like cash without the need to carry it around or put it into a bank account. It can be stored and accessed digitally, making it a very convenient option. They are seen by many as the next wave and evolution of money in our growing digital economy.
So what measures are other world governments taking?
The Bahamas
The Caribbean country started its trial on the island of Exuma and has since expanded its “sand dollar” digital currency nationwide in October 2021.
The Bahamas implemented this intending to crack down on counterfeiting and money laundering while also providing banking access to residents on smaller islands.
The European Union
Christine Lagarde, President of the European Central Bank, stated in March 2021 that a CBDC has the potential to be officially issued in the EU within the next four years. With the digital euro in the making, some other countries in the EU have also contributed to researching it.
France has conducted several pilots and tests to see how feasible a CBDC will be. In fact, the national banks of France and Switzerland are exploring cross-border settlements with CBDCs but have stressed that these transactions are still exploratory in nature.
In recent announcements, Italian payments giant Nexi has begun working with the European Central Bank. Nexi CEO Paolo Bertoluzzo states, “We are engaging with the European Central Bank and contributing to the design of the future digital euro because we believe that can be a positive force in the evolution of digital payments.”
Venezuela
Venezuela originally tried to implement a digital currency in 2018 with the Petro in an attempt to distance itself from the USD. However, it was rarely used in transactions and failed to catch on.
The Central Bank of Venezuela has recently announced that they will be launching a CBDC in October 2021 along with a monetary redenomination that will reduce sex zeroes from the currency as the result of inflation.
The digital bolivar will also have an SMS-based exchange system to facilitate payments and transfers. “The bolivar will not be worth any more or any less, in order to facilitate its use, it is being taken to a simpler monetary scale,” says central bank officials.
The Future of CBDCs Moving Forward
The CBDC train is not slowing down and its potential is expected to grow as more and more countries experiment and adopt their own version of a digital currency. China is seen as leading the charge considering the country has been moving away from physical coin and paper transactions.
According to the Brookings Institution, there have been more than $41 trillion in mobile transactions with about 92% coming from WeChat Pay and Alipay.
The U.S. still has a lot of catching up to do and commercial banks taking a more adversarial stance is not helping. The American Bankers Association said in a statement: “The proposed benefits of CBDCs to international competitiveness and financial inclusion are theoretical, difficult to measure, and maybe elusive.”
The U.S. financial system is dominated by financial institutions, such as commercial banks, and they can lose both profit and financial power if CBDCs become more popularized. Even transaction apps like Venmo, PayPal, and Zelle work through the banking system rather than around it.
Developments of a CDBC in the U.S. are still pending and will most likely be so for many years with no timeline in sight.
From our beginnings in bartering and coin to paper money and now digital currencies, will we be saying goodbye to physical cash altogether in the future?
