Central Banks All-in on Cashless Cash

In my September Patron Post, I promised to compose an article that would bring us up to date on what the central bankers of the world have been saying about their plans, particularly with respect to digital currencies. This is that article. (I felt it more important to get out my other Patron Post this week about the Fed’s plans for personal Fed bank accounts, so I did that one first.)

This article is broken down by central bank or international corporation, bringing us up to date with moves toward digital currencies all over the world over the course of summer and fall. As you will see, all of the world’s major central banks are working on moving to their own central bank digital currencies (CBDCs).

MasterCard

By way of introduction to where central banks all over the world are on this, let’s start with what MasterCard revealed in September:

80 percent of central banks surveyed are engaging in some form of Central Bank Digital Currencies (CBDCs) work, and about 40 percent of central banks have progressed from conceptual research to experimenting with concept and design, according to a recent survey by the Bank for International Settlements.

Today, Mastercard announced a proprietary virtual testing environment for central banks to evaluate CBDC use cases. The platform enables the simulation of issuance, distribution and exchange of CBDCs between banks, financial service providers and consumers. Central banks, commercial banks, and tech and advisory firms are invited to partner with Mastercard to assess CBDC tech designs, validate use cases and evaluate interoperability with existing payment rails available for consumers and businesses today….

Sheila Warren, Head of Blockchain, Digital Assets and Data Policy at the World Economic Forum, said: “Collaborations between the public and private sectors in the exploration of Central Bank Digital Currencies can help central banks better understand the range of technology possibilities and capabilities available with respect to CBDCs.

MasterCard

They are all in on it together; and, as you’ll see below, the timing of “today” really does mean we’ll be seeing initial phases roll out in less than a year. (China has already been first to step out.)

It seems many people think blockchain currencies — if CBs go with something like that — will provide anonymity. Not so according to Zero Hedge, which has spent a lot more time researching and writing about blockchain than I have: (I’m not sure, however, CBs have any need or desire to use blockchain technology. What would be the point when they can simply decree any amount of money they want into existence? They just need to have a means of transacting with those technologies.)

Blockchain-based digital currencies will allow central banks to have a real-time map of absolutely every monetary unit in circulation, and every single economic transaction, something they can’t do with trillions in anonymous paper money still sloshing around.

ZH

A map of where all the money is going, probably means a map to you, not just to wear anonymous cash is flowing. Who would you rather trust with the privacy you currently already have with untraceable hard cash than MasterCard and a herd of central banksters? Says, MasterCard of its own current involvement:

This new platform supports central banks as they make decisions now and in the future about the path forward for local and regional economies.

China syndrome becoming an international meltdown

Let’s be clear. China wants out of the dollar. The biggest takeaway on Chinese moves to a yuan-based CBDC is that it is about taking financial hegemony away from the US and securing it for China.

The following expression of that battle is from Hong Kong’s English-language newspaper of record:

China must brace for a full-blown escalation of the struggle with the United States and prepare to gradually decouple the Chinese yuan from the US dollar, a former senior Chinese diplomat warned amid the continued downward spiral in relations between the world’s two largest economies.

Zhou Li, a former deputy director of the Communist Party’s International Liaison Department – which manages relations with foreign political parties, organisations and elites – is the latest in a series of voices in China calling for the country to be ready for a currency split with the US amid growing signs of financial war in recent weeks.

“By taking advantage of the dollar’s global monopoly position in the financial sector, the US will pose an increasingly severe threat to China’s further development,” Zhou wrote….

China should now make preparations to insulate itself from “dollar hegemony and gradually achieve the decoupling of the renminbi from the US currency”, Zhou said. “The US dollar could become a major risk issue that ‘has us by the throat’.”

South China Morning Post

As the tool of diplomatic choice for the US seems always to be more sanctions nowadays, Zhou is right. The US has weaponized the dollar, driving others away from using it. If you were in the shoes of those nations, you would try to escape the dollar’s clutches, too.

His remarks also mirrored a growing consensus in Beijing that China should “give up the illusion” of friendship but instead prepare for a full-fledged conflict with the US….

The US had been able to leverage the dollar-dominated SWIFT international payments messaging system to extend “long-arm jurisdiction” for its policies outside America, including sanctioning Russia and Iran, Zhou noted. Sanctions against energy suppliers could jeopardise China’s energy security, he warned….

Zhou said Beijing must never underestimate the determination of both the Trump administration and the US Congress to continue to suppress China. The Chinese leadership must have a sober understanding that a complete break-up with Washington could be inevitable.

It’s not surprising, then, that “China Has Quietly Cut Dollar Usage in Cross-Border Trade by 20%.“

Goldman Sachs … warned overnight … that for the first time “real concerns are emerging” about the future of the dollar as a reserve currency….

As Bloomberg’s Ye Xie summarizes, “it seems like a perfect storm for the U.S. currency: the relentless decline of real yields, the U.S.’s inability to control the virus, the overhang of the twin deficits and the dear valuation….”

Meanwhile … with the U.S. now using the privileged role of the dollar for political gains, such as penalizing banks over issues in Hong Kong and Xinjiang for instance, it will naturally alarm politicians in other countries, Xie adds….

Indeed, as Xie adds, China is already … quietly reducing its reliance on the dollar in cross-border trade and services. The percentage of the payments and receipts denominated in yuan … increased to 37% in June, from 19% two years ago … with the Bloomberg strategist also calculating that the usage of the dollar has declined to 56% from 70%….

“By extension, one has to wonder what Beijing might to do with its $1.1 trillion Treasury holdings.”

Zero Hedge

The last point is, of course, a longtime concern because, IF (big “if”), China should stop buying US treasuries, it would create huge pressure on treasury interest rates because China is still a major buyer, though it has backed away some from its former high position. We are utterly dependent on low interest rates on the astronomical US debt.

China wants a high-tech exit from the dollar. I’ve been covering in earlier posts how China is rushing to be the first entrepreneur in central bank digital currencies. I last announced China’s launch of phase one in going digital with the yuan.

The update is that, in August, China launched a move to a broader phase two:

China’s Commerce Ministry released new details … of a pilot program for the country’s central bank digital currency (CBDC) to be expanded to several metropolitan areas, including Guangdong-Hong Kong-Macao Greater Bay Area, Beijing-Tianjin-Hebei region, and Yangtze River Delta region….

China’s CBDC is also known as a digital currency electronic payment (DCEP) and could become the first national digital currency. In April, the PBoC tested DCEP among government workers in Suzhou. Major state banks have also been administering large scale tests of digital wallets designed for a digital currency, or as the world will eventually find out: the digital yuan….

Beijing owned China Global Television Network (CGTN) said test subjects would be able to “withdraw money, make payments, and transfer money after registering with their mobile phone number….

As for CBDCs, Steven Guinness, an independent UK economic and geopolitical analyst, provides his take on the subject:

“The ideological agenda of central banks to digitise the entirety of the world’s financial system and to maintain their power base is being spearheaded by the Bank for International Settlements through their Innovation Hub. Unless people begin to recognise where the manipulation and growth in the CBDC narrative is coming from, and how there is a targeted agenda to guide the world into a cashless society, global planners will in the years to come get their way,” Guinness said.

Zero Hedge

We saw in the Fed’s statements presented earlier this week where the Fed acknowledged that it is working closely with the BIS on the technological development of its own CBDC, though the Fed says it has not, yet, made the decision of whether to move to a CBDC.

For not having made the decision, they are expending an extraordinary amount of money and time researching the decision and are now routinely talking about a Fed CBDC. It think that “not making the decision” simply means they haven’t made the decision to launch, but they have clearly stated they are directing the technological development with MIT and coordinating that with the BIS — the best brains and the biggest banks.

Bank of England sets a sterling example

Not to be left behind, the Bank of England is also debating whether or not it wants to issue its own CBDC.

Said BoE Governor Andrew Bailey,

We’ll go on looking at it, as it does have huge implications on the nature of payments and society…. I think in a few years time, we will be heading toward some sort of digital currency…. The digital currency issue will be a very big issue. I hope it is, because that means Covid will be behind us.

Bloomberg

This is nothing new. The BoE has been discussing digital currencies openly since 2014, though few media are reporting about it. Right now I’m sure the BoE has bigger fish to fry with just making it through Brexit, but it wants you to know it is working on it.

Most interesting is Bailey’s last mysterious statement. Why would digital currency moving into the forefront mean Covid is “behind us?” What has one to do with the other?

This linkage has come up before, so the only thing I can think of is Bailey’s statement relates to other places where we have seen Covid and digital cash linked, such as the Bank for International Settlement’s statements this year that capitalized on Covid to smear cash as “dirty money”:

Irrespective of whether [Covid] concerns are justified or not, perceptions that cash could spread pathogens may change payment behaviour by users and firms. In past crises, demand for cash has often increased, as consumers have sought a stable store of value and medium of exchange…. But in the United Kingdom, automated teller machine (ATM) withdrawals have fallen…. In the medium term, the outbreak could in principle lead to both higher precautionary holdings of cash by consumers and a structural increase in the use of mobile, card and online payments….

Current developments bring digital payments to the fore. Yet not all digital payments are immune. For instance, debit and credit card transactions generally require a signature or a PIN entry at a merchant- owned device for larger transactions (Graph 5, centre panel). Contactless card payments, which are popular in several countries (Graph 5, right-hand panel) do not require a PIN for small transactions….

If cash is not generally accepted as a means of payment, this could open a ‘payments divide’ between those with access to digital payments and those without. This in turn could have an especially severe impact on unbanked and older consumers…. In many of the emerging market and developing economies where authorities have recently called for greater use of digital payments, access to such alternatives is far from universal. This could remain an important debate going forward, potentially asking for a strengthening of the role of cash.

Resilient and accessible central bank operated payment infrastructures could quickly become more prominent, including retail central bank digital currencies….

In the context of the current crisis, CBDC would in particular have to be designed allowing for access options for the unbanked and (contact-free) technical interfaces suitable for the whole population. The pandemic may hence put calls for CBDCs into sharper focus.

Bank for International Settlements

Central banks are hoping Covid will cement the willingness to move away from “dirty cash” and toward contact-free digital payment systems. The BIS has placed itself in the central role of being the recognized technological hub for all the world’s CBDCs as the ultimate digital payment systems.

The BoE governor’s statement, therefore, makes me wonder if he feels the movement of CBDCs into the mainstream will mean Covid has accomplished its purpose, whether designed for such purpose or merely opportunistically co-opted to serve that purpose.

The ABCs of ECB CBDCs

The European Central Bank has begun experimenting on its launch of the digital euro an looks like it is nearing a rollout. On September 22 the ECB filed a trademark claim on the term “digital euro.” (Shall we just call it the “duro?” The Germans are probably appeased by the abbreviation for the digital euro — DE.)

The trademark for the term “digital euro” includes protection over its application in technology, such as computer hardware, firmware and software, as well as blockchains. It protects the terms use in Financial affairs; monetary affairs; banking services; credit card and debit card services. Sounds like they’re ready to go to market.

Writes the head of the ECB:

As with all banks trying to ease the imminent advent of their new digital currencies, the change does not involve going cashless (…yet). The bank notes,

A digital euro would complement cash, not replace it: together they would offer people a greater choice and easier access to ways of paying. This should help financial inclusion and promote innovation in the field of retail payments.

It is too early to identify any specific type of digital euro, but we have laid down some basic requirements, such as robustness, safety, efficiency, privacy and compliance with the law. We will now listen and experiment to define what it might look like in the future 3/3

Source: Twitter

The digital euro is merely a compliment — err, complement — to the friendly euros you already have. And how long will the new duro be in coming? The ECB promises it will decide whether or not to make the launch mid-2021.

Somewhat ironically, the ECB prefers the duro to what it calls Facebooks “cartel-like” planned digital currency, the libra. Did we just hear the ECB worrying that someone other than them is “cartel-like?” That’s precious. Ah, 2020 is, indeed, a weird year.

Bank of Japan planning phase-one experiments for early 2021

Earlier this month, the Bank of Japan joined the parade of banks talking openly now about how they are developing a CBDC, announcing …

Digitalization has advanced in various areas at home and abroad on the back of rapid development of information communication technology. There is a possibility of a surge in public demand for central bank digital currency (CBDC) going forward, considering the rapid development of technological innovation. While the Bank of Japan currently has no plan to issue CBDC, from the viewpoint of ensuring the stability and efficiency of the overall payment and settlement systems, the Bank considers it important to prepare thoroughly to respond to changes in circumstances in an appropriate manner. With this in mind, the Bank decided that it would publish its approach to “general purpose” CBDC — that is, CBDC intended for a wide range of end users, including individuals and firms.

Bank of Japan

The BoJ is talking about “introducing a payment instrument alongside cash” — so, also a phased approach, just as my last Patron Post described for the Federal Reserve. The BoJ is going to ease acceptance.

For the time being, it is unlikely that the cash in circulation would drop significantly. If, however, this should become the case, and if private digital money will not substitute for the functions of cash sufficiently, the Bank might provide general purpose CBDC as a payment instrument alongside cash. As long as there is public demand for cash, the Bank will stay committed to supplying it.

Note that a CBDC is not exactly the same thing as “digital money.” The latter is a broader term that refers to all digital financial transactions, such as use of your credit card or debit card or wire transfers, PayPal, or, I suppose, cryptocurrencies. “Digital money” includes CBDCs but is broader. The BoJ presents the following picture of the amounts of different kinds of “digital money” already in use in Japan:

In addition, from a broader perspective, initiatives such as the issuance of CBDC by the Bank and innovative overlay services of private payment service providers (PSPs; e.g., banks and non-bank PSPs) could lead to stable and efficient payment and settlement systems suitable for a digital society.

Unlike the US central bank where our own Federal Reserve president indicated commercial banks could be cut out of the loop (I doubt it), the BoJ makes it clear that any CBDC it issues will be done through its member banks: (Of course it will. So will the Fed’s.)

Even if the Bank were to issue general purpose CBDC, it would still be appropriate to maintain a two-tiered payment and settlement system of a central bank and the private sector. This means that CBDC would be issued indirectly through intermediaries.

Issues the BoJ is looking at as important to a robust CBDC are…

• Universal accessibility for individuals and the devices they use for making transactions.
• Security from counterfeiting or hacking and other illicit activities.
• Resilience for being used anywhere at any time, including during network failures or power outages.
• Instant payment similar to cash with settlement finality similar to cash.
• The central bank’s processing capability and scalability.
• Interoperability with other payment systems with future adaptability.
• Preservation of economic/financial stability.
• Privacy of personal data. (Not necessarily the same thing as anonymity.)
• Innovation. (Bill Gates made certain we have to have that word attached to everything we do now. I even saw it as a motto on a food supply company, as if I need or even want innovative food.)
• Suitability for cross-border payments.

While the final goal could just mean that the CBDC must function with some kind of electronic currency exchange, it’s also not hard to imagine these CBDCs could merge or evolve over time toward some kind of unified global currency.

The list above is worth mentioning because I’m sure all central banks share the same concerns, and it explains why a lot of research remains to be done before some banks step in with something over which they are confident.

The bank says it intends to go straight to an experimental approach through proof of concept, rather than confining itself to just conceptual development. Eventually, it will move to pilot programs in the economy, perhaps similar to what the People’s Bank of China is doing now, though the PBoC is clearly much further along.

Of course, there is the need with all CBs to work out a clear legal framework with their sovereign.

The BoJ states, similar to the Fed in my last article:

If CBDC were to be issued, extensive and large-scale efforts would need to be made, including an exploration of information technology (IT) systems and institutional arrangements. While the Bank of Japan currently has no plan to issue CBDC, from the viewpoint of ensuring the stability and efficiency of the overall payment and settlement systems, the Bank considers it important to prepare thoroughly to respond to changes in circumstances in an appropriate manner.

All of this makes it sound as though the time by which we will begin to see phased versions or proofs of concept roll out for public testing is far off. However, the BoJ says its first public roll-out will be in the early part of its 2021 fiscal year, which begins April 1. Which also means they have already been working on this for some time. They are reaching testing phases, which is why they are beyond remaining conceptual and are talking openly about it.

Conclusion

The Bank of Canada has begun its own research. Sweden is developing the e-Krona. As MasterCard said, 40 central banks are already rolling out test models. Most of the rest are developing concepts.

The advantage the Federal Reserve has is that the dollar is already used globally, opening a mechanism for introducing a global digital currency because all nations will want to make sure their systems are compatible with the US dollar (if the dollar is not thrown over by other nations before the Fed gets there).

Important Thread:

If you don’t think Central Bank Digital Currencies are coming, you are missing the big and important picture. This is going to be the biggest overhaul of the global financial system since Bretton Woods.

— Raoul Pal (@RaoulGMI) October 18, 2020

As discussed in my last Patron Post, the bigger objectives of CBDCs and/or personal bank accounts at central banks is more direct bank control over the economy and more government control over you. The banks see that they have run their course on where they can go with interest rates and with the effectiveness of QE. To regain potency, they need new powers.

Thus, we see the Fed taking no further steps with QE on its own, lest it merely demonstrated once again the inefficacy it ran up against last March. It is waiting for the Federal government to proffer fiscal policy because the Fed can only work with giving money to banks and other institutions, but the Federal government can give it directly to you.

That said, the Fed and other central banks would ultimately like their sovereigns to entrust them with fiscal power, and that means they need direct access to giving you money — QE to the people.

While that certainly sounds a lot nicer than QE to the banksters over and over, which only trickles down to major players in the stock market, just keep in mind that it requires you cozying up your bank account to central bankers and requires government’s giving bankers more power over the economy as central planners. We’ve seen already now well they do with that. It’s like turning the peanut-butter factory over to the chimpanzees.

With the BoJ looking at road-testing a proof of concept as early as perhaps this coming spring, and with China having already launched their road test this past summer and now having moved to phase two, which is just a broader circle off tests, can the Fed be far behind? The Fed talks about all the development it has to do, and how it is going slow; but we just saw how Japan says the exact same thing and that means taking things for a trial spin in early 2021.