The collapse of crypto lending firm Genesis late Thursday dealt another blow to crypto’s world-conquering ambitions last week — but that doesn’t mean the global financial system is safe from technological disruption just yet. While the venture capital-backed crypto industry continues to go off the rails, state-backed efforts to create a new, tech-enabled monetary order are starting 2023 with a full head of steam. Governments and central banks around the world are pursuing digital upgrades to their currencies, often incorporating the distributed ledger technology used by cryptocurrencies as they do so. Many of them see the occasion as an opportunity to pursue alternatives to the dollar-dominated global monetary system. Over the course of the last year, the crypto craze dovetailed with inflation concerns and the expansive use of Western sanctions against Russia to make potential shifts in the monetary system a hot topic in world affairs. Western monetary authorities stepped up their efforts to fend off upstart competitors, while countries like Russia, Iran, and China saw the new technologies as a chance to take the dollar down a peg. As private crypto projects flounder, these state-led efforts could take center stage in 2023. Some of the changes afoot have been decidedly old-school: Central banks bought record amounts of gold in the third quarter of last year, and it was revealed last month that some of it ended up in China’s vaults. But much of the change is tech-forward, including the development of central bank digital currencies, which often incorporate distributed ledgers similar to those first employed by non-state cryptocurrencies. The latest eye-catching scheme being floated is a little bit of both. Reports last week out of Russia indicate that officials in the country are in discussions with counterparts in Iran about creating a gold-backed stablecoin to facilitatetrade between the two countries. Washington is greeting this particular “back to the future” idea with skepticism. Rich Goldberg, senior advisor at the hawkish Foundation for Defense of Democracies, said it was too soon to say whether this amounted to “hype” or a “credible transaction channel.” “I put this in the category of ‘statement to annoy the West’ as opposed to actual means of commerce,” opined another D.C. think tanker. But less exotic efforts to use digital upgrades as an opportunity to explore alternative monetary arrangements are gaining serious ground. (Not to mention stateside efforts to develop a digital dollar) Credit Suisse analyst Zoltan Pozsar published an essay in the FT on Friday that highlights what he sees as the growing threat to dollar hegemony from central bank digital currencies, or CBDCs. “Around the world, but particularly in the global east and south, CBDCs are spreading like fast-growing kudzu vines,” writes Pozsar, who made waves last March with a note predicting the birth of a new global monetary order that would see a greater role for Bitcoin, gold and other commodities. In his latest piece, Pozsar predicts that these non-Western CBDCs will increasingly link central banks directly to each other, bypassing the dollar-based banking system. Ananya Kumar, associate director for digital currencies at the Atlantic Council, said that what is telling is not just the sheer number of CBDC experiments in the works right now, but also the types of projects. Wholesale CBDCs, which are designed for interbank payments, have greater potential to disrupt the architecture of the monetary system, she said, than retail CBDCs, which are designed to be used by individual citizens. Kumar estimated that in the last year the number of serious wholesale CBDC experiments has roughly doubled from about a half-dozen to a dozen, something she takes as a signal of growing interest in de-dollarization. On Thursday, at the World Economic Forum in Davos, a Hong Kong-based company working with the Chinese government unveiled a competitor to the Belgium-based Swift Network — which currently dominates inter-bank payments — that is designed to work with CBDCs. Then there’s MBridge, a collaboration between the Bank for International Settlements and monetary authorities in Hong Kong, Thailand, the U.A.E. and China. Making use of a distributed ledger, it seeks to create a shared digital infrastructure that works with multiple CBDCs. This fall, the project’s backers completed a six-week pilot project and made clear their intention to keep pursuing it. Their report on the pilot concluded that their ultimate goal is “realistic and achievable.” Those two words are rarely associated with crypto. But governments around the world are pouncing on the chance to co-opt aspects of its underlying technology in pursuit of a vision of the future of money that is a touch less radical than Satoshi Nakomoto’s.
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