In January, this newsletter took a look at emerging ideas for state-backed digital money — speculating that a new breed of e-money was poised to take the center of the global stage. As we cross the mid-year threshold, a slew of developments from the U.S., Europe and the rest of the world show that the future of state-backed money is starting to crystallize. By and large — despite the many obstacles to these technically demanding and politically sensitive overhauls — the world’s monetary authorities are demonstrating that they remain determined to move them forward. Here are three takeaways from the current state of play. Wholesale remains an easier sell. On Thursday, the New York Fed and its partners announced that a three-month digital dollar pilot for global payments had shown promising results. This represented a notable spurt of progress in American monetary innovation, and it’s no surprise it came on the wholesale side of central bank digital currencies, which pertains to transactions between financial institutions. Up to now, the U.S. has lagged much of the rest of the world in CBDC development. In part because the stewards of the global reserve currency have less to gain from changes to the monetary status quo. But it hasn’t helped that the idea of a CBDC has encountered populist opposition in the U.S., where opponents have speculated it could be used to impose a restrictive social-credit system. Even in Europe, which is well ahead of the U.S. in its CBDC development, privacy concerns are proving a sticking point. When the European Commission unveiled draft CBDC legislation late last month, one commissioner felt compelled to declare to reporters, “This is not a Big Brother project.” But such concerns are much more relevant to retail CBDCs, which are meant for use by individual citizens, leaving a path open for wholesale projects like the New York Fed’s. Geopolitics is driving tech developments. Last week, Russian state sources reported that the emerging BRICS [Brazil, Russia, India, China, South Africa] economies are planning to introduce a new gold-backed currency at the bloc’s summit next month in South Africa. The reports contradict comments made last week by an executive at the BRICS development bank, Leslie Maasdorp, who told Bloomberg TV on Wednesday that a new shared BRICS currency remains a “medium- to long term-ambition.” The Russian state reports may represent wishful thinking, but they reflect the sustained desire of non-Western nations to develop alternative monetary arrangements to the dollar system, particularly in the wake of U.S. sanctions of Russia over its Ukraine invasion. That has spurred many countries to accelerate their exploration of CBDCs — including calls for a gold-backed digital BRICS currency — which in turn has heightened the urgency around the West’s own CBDC efforts. “Once the U.S. and Europe saw these developments, they became much more engaged as well,” said Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center, which publishes the think tank’s CBDC tracker. Governments are borrowing from crypto. As governments pursue digital upgrades of their currencies, one open question has been how much they will borrow from the wild world of crypto. Crypto skeptics view most blockchain-based innovations as useless, while many crypto purists argue that there is little point to use a blockchain for a system in which government authorities retain control. “They keep on wasting money and resources and time,” argued Sam Callahan, lead analyst at Bitcoin-only investment firm Swan Bitcoin. So it’s noteworthy that the successful experiment reported last week by the New York Fed and its partners made use of a (private, permissioned) blockchain — a design element that many CBDC projects eschew. Central banks also remain interested in some of the more exotic innovations to come out of decentralized finance, as demonstrated by an interim report published late last month by Project Mariana, a collaboration between the Bank for International Settlements and monetary authorities in Europe and Asia exploring digital upgrades to foreign exchange markets. The interim report confirms that the initiative is continuing to incorporate crypto-native innovations like liquidity pools, automatic market makers, and cross-chain bridges. That’s notable because many of these elements have been associated with some of crypto’s most spectacular failures. For example, bridges, tools for making separate blockchain networks interoperable, are notorious as weak links that hackers have repeatedly exploited to steal crypto funds. (The Bank for International Settlements published a report about defending CBDCs from cyberattacks on Friday.) While “crypto” and associated terms have acquired a taint that makes them politically unpalatable in many corners, the world’s monetary technocrats remain willing to try all available tools in the race to build the financial systems of the future.
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