CBDCs May Be Closer than You Think

You could say that Argentineans trust the US dollar more than their own currency.

While the official currency is the Argentinean peso, the US dollar plays quite a prominent role in Argentina’s economy.

Argentineans hold saving accounts in US dollars; they buy property in US dollars and buy US dollars before travelling abroad.

The reason for this is that the country has suffered from bouts of inflation and hyperinflation throughout its history, even having to take measures like slashing zeros from its currency or entirely replacing their currency for a new one.

So any time the population loses confidence in the peso, they exchange their money into US dollars to preserve value.

Point is, when people see the value of their money erode, they will look for an alternative store of value.

We are living through some interesting times in regards to money.

Cash has become the undesirable during the pandemic. There’s been a rush to gold as countries have increased stimulus to unprecedented levels.

And then in the last decade we’ve seen the rise of cryptocurrencies like bitcoin and private initiatives and proposals like Facebook’s Libra.

Central banks have said they are slowly testing the waters to develop their own central bank digital currencies (CBDCs). Differently to bitcoin, these would be completely centralised.

But the fact is now 80% of central banks are already considering them as not only a way to include more people into the financial system, but to fight back against alternative currencies like bitcoin.

Regular readers know I’ve written quite often about central bank digital currencies lately.

Things are happening fast now in this space.

A couple of weekends ago I wrote about how China has already been testing the digital yuan by giving some of its citizens free money, and how central banks could create inflation through CBDCs. You can read more on this here.

And last week I wrote on the tug of war happening between centralisation and decentralisation and how CBDCs could give more power to central banks. You can read more on this here.

CBDCs could be closer than we think…

Recently the Financial Stability Board, an international organisation that issues advice on the global financial system, released some recommendations on stablecoins, like Libra. Stablecoins are usually pegged to another currency, commodity or a basket of those to decrease volatility.

But this little passage will show you why there’s a worry about rising competition from stablecoins:

While so-called “global stablecoins” have the potential to contribute to developing new global payment arrangements, they could present a host of challenges to the regulatory, supervisory, oversight and enforcement authorities. This is because such instruments may have the potential to pose systemic risks to the financial system and significant risks to the real economy, including through the substitution of domestic currencies.

Don’t get me wrong, I’m not advocating for Libra, but for having different options.

I think that CBDCs could be closer than we think.

Following in China’s steps, this week the Swiss Central bank and the Bank of International Settlements (BIS) — also known as the bank for central banks — have joined forces to test a central bank digital currency by the end of this year.

From Coindesk:

Presented by Benoit Coeure, head of the BIS Innovation Hub, at the Bund Summit in Shanghai, Oct. 23–25, the proof-of-concept initiative would be underway before then end of the year and would open a route to experimentation looking at use cases for a wholesale CBDC.

These could include how the digital currency might interoperate with existing payment systems, a role in digital identity and tracking financial compliance, per the report.

Such use cases would require more work on the blockchain technology underlying the CBDC, Coeure said.

BIS will also look into how to facilitate cross-border payments using digital currency between central banks such as including the Hong Kong Monetary Authority and the Bank of Thailand.

According to Coeure, the BIS Innovation Center is already carrying out experiments in Singapore, Switzerland and Hong Kong, and has plans to expand the work to Germany, France, the U.K., Sweden and Canada.

A wholesale CBDC would apply to deposits that financial institutions hold with a central bank. But Benoit also said this could also pave the way for retail uses, that is a CBDC people could use.

We are in a struggle between centralisation and decentralisation. Heading for a world where central banks are debasing their currencies and alternatives are under fire.

But as I said, it’s all based on confidence. And when there’s a loss of it, people will move to what they consider the best alternative.


Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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