The steady year-long momentum increase in sovereign digital currencies -- interrupted only by COVID-19 -- continues to intensify. As the time series data from our PolicyScope Platform indicates, policymakers are making up for lost time in the spring with a stream of speeches and actions that illustrate they are serious about issuing electronic versions of their fiat currencies in the very near future.
Policymakers are taking concrete action to prepare the way for issuance. Between Friday and Monday, the competition among central banks intensified considerably, no doubt spurred by the influential SIBOS conference underway right now,
Today's Dramas: China and the European Union
Sequentially, the European Union acted first. The European Central Bank (ECB) acted first by releasing a dense, technocratic, and technical report paired with a blogpost from an Executive Board member pointing the way towards possible issuance in 2021. The move was followed in quick succession by European Council Conclusions (from heads of state and government of the European Union) on Friday and a Eurogroup Communique (from finance ministers and central bank governors of the EuroArea) this week charting a clear and ambitious roadmap for consultations designed to lead to a concrete decision regarding e-euro issuance in 2021.
Chronologically these moves occurred first, but they remain reactive relative to China. Beijing has been actively implementing a rapid and proactive approach to digital currency issuance. For more background on Chinese initiatives, please see this analysis originally prepared for the Atlantic Council and the companion analysis of Western initiatives also originally published by the Atlantic Council.
Yesterday at the SIBOS conference, the Peoples Bank of China Deputy Governor revealed the breadth, depth and maturity of ongoing Chinese digital currency pilot projects. Compare their statements:
The "winner" in this race may not necessarily be the first to float a digital sovereign currency. A range of technical architectural choices made quickly in China are not likely to be deemed suitable for western liberal democracies. Chief among these choices are authentication mechanisms that include facial recognition, fingerprints, and other personally identifiable physical characteristics. Western perspectives providing data privacy protections to consumers may also delay launch outside of China while potentially making certain data usage (e.g., credit scoring) off limits.
China also has the luxury of moving quickly because its currency currently is not yet an official reserve currency globally.
Reserve currency central banks (particularly in the United States, Europe, and the UK) must move more deliberately. They cannot risk inadvertently generating volatility or a loss of confidence in their currencies given the spillover effects such consequences would have on the global economy.
This would be true in the most benign economic environments; it is particularly true amid a pandemic whose full impact has not yet been felt in the global economy.
The Other Two Major Runners in the Race
Many draw the mistaken conclusion that the sovereign digital currency race has only two players (China and the EU). However, both the Bank of England and the Federal Reserve are active even when they are relatively silent. Our regular readers will recall that the Bank of England was active on these issues earlier in the summer (when most were distracted by COVID-19 economic developments) and that the Federal Reserve released details regarding its extensive national activities on these issues on a quiet Friday in August (when most were enjoying summer vacations.
For example, when the Bank of England's Financial Policy Committee provided this statement in early August, we considered it to be "forward guidance" regarding policy trajectories in the UK regarding digital currency.
So we and our PolicyScope Risk Monitor customers were ready when summer vacation ended and the Governor of the Bank of England entered the fray with this statement:
Even incremental policy shifts that occur in this area hold major implications for how people make payments, interact with central banks, and how our economy functions. These shifts go far beyond financial inclusion and operational efficiency (although these things are important.
Cryptocurrency issuers will soon have serious competition for credibility and loyalty in the form of G7 central banks. In addition, the structure of global reserve currency relationships may shift depending on whether (or not) a currency is available in digital format.
The consequences for sovereign bond markets, monetary policy, and market liquidity over the long term will generate disruption as well as economic evolution. Those of us following the CBDC debate have a ring-side seat for all of it, which means we will see tectonic global macro shifts coming long before the rest of the market..
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