Today, we have the greatest transition period in world history. As it happened with the first industrial revolution when new technologies radically changed society, blockchain-based digitisation plays a crucial role in reshaping the world order, and it will continue to heavily influence global scenarios over the next decades. Where is this leading to?
The rapid progress of digital currencies
All over the world, banks are fostering the adoption of digital currencies (the so called CBDCs – Central Bank Digital Currencies) as more generalised digital assets, which could be used alongside coins and notes and serve as a peculiar form of payment available to all and accepted by all. Still, there are still many unresolved issues about its development and implementation, especially when it comes to the role of commercial banks and central banks in the approval of the transactions, which should somehow integrate the distributed ledger technology, the basic network platform for all cryptos and digital currencies transactions. Nevertheless, its growth has accelerated in recent years as many governments support digital currencies through economic statistics such as China’s digital yuan. In general, governments are increasingly trying to control and intervene in this issue, and global hostility to digital currencies is heating up.
While the adoption of CBDCs leads to significant innovations and developments affecting financial institutions, analysts and policymakers focus primarily on its technical and regulatory implications, as well as its impact on the political and economic impact of states. CBDCs certainly make payments, settle agreements and facilitate trade, especially in the case of global trade, although this could change the role of existing firms in terms of money and payments.
Winners and losers are created from historical eras of social change and progress. Who represents the leader in new trends today and who will lead this transformational change in the forthcoming years? The answer to this question is complex and is currently unclear, but serious economic technology to dominate the infrastructure and technology of digital finance triggers short-term competitive innovations in the “arms race” with long-term consequences.
The players of digital currency competition
Around 80% of the world’s central banks are researching and exploring their own digital currency versions, but only China, the United States and the European Union have the resources and the infrastructure to determine the future direction and trends of the digitalisation of the currency basis. With its leadership in the crypto ecosystem, China’s coordination activities (which account for 90% of trade volume and two-thirds of bitcoin mining activity) will somewhat benefit.
China is making a significant difference in this global competition between CBDCs, investing in technology and experimenting very quickly. Even in the most isolated areas, electronic payments like WeChat Pay are widely used by the population. In recent years, the country has put a lot of effort in advancing the digital yuan as a common priority for the state, aiming to compete with the US dollar by creating a digital Asian alternative tracking and controlling money movements inside and outside the country. As of now, it seems very much the case that China is moving faster than the US and Europe in implementing and spreading such changes.
On the other hand, Europe is in a strong position to form a CBDC, but unlike the efforts of small, individual countries such as Sweden, the size and volume of the EU digital currency is stable in the long run and can compete on a scale. The European Central Bank is carefully examining a digital alternative possibility for the euro, scheduling a 2021 review phase for the digital euro this year first. However, it does not plan to launch the digital currency in full within the next three years.
The US is at the forefront of inventing, regulating and enforcing blockchain-based digital securities, banking, payments and insurance, but lags behind others when it comes to CBDCs. Space technology leaders are paving the path for a large-scale implementation of a digital dollar and liquidity by building systems, but there’s still no clear time-frame for these innovations to happen in the US.
CBDCs impact on interstate economic and security relations
When it comes to the economic impact of digital currencies, one can really understand the extent to which current equilibria are likely to be reshaped soon after the massive geopolitical impact of the rapid development of CBDCs.
Firstly, the central bank’s digital currencies act as reserve assets. This undermines the US dollar’s current strong position as the world’s largest reserve currency, with huge consequences. Much of the domestic and military expenditure of the US is a by-product of its ability to incur larger amounts of debt, which would not be possible in other conditions.
Secondly, as CBDC are designed for cross-border payments, they are not processed through the Society for Worldwide Interbank Financial Telecommunication network, on which the US relies heavily for one very important reason, namely to allow the use of sanctions as one of its most powerful foreign economic policy tools. The creation of sovereign digital currencies operating outside of this network would reduce the capacity of the US to enforce sanctions, increasing the possibility of rogue states to disregard them.
Thirdly, central bank digital currencies offer new perspectives on rethinking global international debt. As the growing discontent with the US dollar is self-evident, countries are increasingly interested in alternative debt instruments. Switching from a dollar-denominated global debt market to one that includes central bank digital currencies would certainly undermine the US ability to pursue strategic priorities through its lending plans. It’s also interesting to examine the IMF’s growing interest in central bank digital currencies as new lending instruments, which could allow for Chinese accumulation of power accelerated by the digital yuan.
Lastly, central bank digital currencies require somewhat Internet-based communication between members of the digital currency network. This issue opens up the dangerous panorama of completely new areas of attack in monetary politics, given by the possibility of cyberattacks on a country’s currency system, which could cause potentially catastrophic damages to a country’s economy.
What does the future hold?
What happens with CBDCs will certainly have far-reaching implications on the future of digital finance, but it will probably have an even larger influence on the current economic relations and power equilibria of international relations. Whoever leads this race will most certainly gain a significant advantage, and just as the space race didn’t merely put a man on the moon, but also triggered the invention of important corollary technologies, CBDC adoption will influence the forward-moving progress of new instruments of economic dominance and political influence.