Bitcoin’s Future May Be Dwarfed by Interoperable Central Bank Digital Currencies

Andy Mukherjee is a Bloomberg Opinion columnist specializing in industrial companies and financial services. He was previously a columnist on Reuters Breakingviews. He has also worked for the Straits Times, ET NOW, and Bloomberg News.

Read more opinion Follow @ andymukherjee70 on Twitter

Interoperable digital currencies in your e-wallet can make Bitcoin ATMs like this one in Marseille a picturesque relic.

Photographer: Nicolas Tucat / AFP / Getty

Photographer: Nicolas Tucat / AFP / Getty

The idea that much of today’s money consumption is shifting to digital tokens is neither crazy nor fancy as long as you don’t start by equating the future of money with Bitcoin.

Sure, governments will borrow some elements of the distributed ledger technology behind private cryptocurrencies, but they will be very happy to be in control of what circulates as money in their economies. Some will succeed.

Don’t be surprised if the e-wallet on your smartphone looks like a multi-currency account by the end of the current decade. But instead of dealing with commercial banks, you can be a customer of central banks. Some of them, in fact.

Sound farfetched? Apart from the Bahamian sand dollar, there is still no official online currency in mass circulation. Still, the digital yuan pilots are picking up speed as Beijing seeks a possible rollout that coincides with the 2022 Winter Olympics. Sweden could be the next great nation to follow suit. The Bank of Japan has no immediate plans, but recognizes the possibility of a “surge in public demand” for official digital cash in the future.

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Even in the US just playing with the concept, digital payment instruments that are not based on traditional bank accounts can increase the financial inclusion of money users, according to a paper by the President of the Federal Reserve Bank of Atlanta Raphael Bostic, and others. Treasury Secretary Janet Yellen says a digital dollar is “absolutely worth seeing”.

Once China and the US are in a dispute, virtual money will inevitably become an instrument for exerting global influence by breaking the world into new currency blocks. This is because each token can be used twice outside the borders of the issuing nation. The dollar or yuan that shows up in a phone wallet in Indonesia or India – backed by a solemn pledge from taxpayers in the US or China – could be used to buy goods, services or assets internationally.

This new money can just as easily replace the national currency in people’s daily lives. While this is no different from traditional dollarization in countries hit by inflation and exchange rate fluctuations, the convenience and accessibility of digital cash issued by the central bank could be, according to Tao Zhang, a deputy executive director of the International Monetary Fund.

In order to maintain control over monetary policy, authorities in smaller economies need their tokens to be attractive in domestic political situations. The destination for larger nations may be different: China and the US may want to offer add-ons that make the e-CNY or FedCoin the preferred choice for foreigners when processing international claims.

An efficient future will be one in which all central bank digital currencies are interoperable. In other words, they will interact with each other – and with private-sector alternatives like Bitcoin, says Sky Guo, CEO of Cypherium. The US corporate blockchain startup is a member of the Fed’s Faster Payments Council and the Institute for Digital Currencies of the Official Monetary and Financial Institutions Forum (OMFIF), a think tank for central banks.

Guo is working on the challenges that will arise with the digitization of state funds: How can large transaction volumes be processed quickly, inexpensively and with a strong consensus between the registers, which are automatically updated via a network? How can you give people a sense of privacy with everyday payments, even if the anonymity of cash is lost?

The central banks have to make decisions. Not all Smartphones can run advanced virtual machines and easily run the software code for automated contracts. Choose the wrong technology and the unsanitary population may be left out again. The same goes for overseas transfers, a way for tokens worth $ 124 trillion a year to replace an expensive network of correspondent banks that move money by exchanging SWIFT messages. However, this does not work for small transfers if the computing power for checking transactions in a decentralized network is too high.

The ideal technology does not necessarily have to be a blockchain, but should “be light, flexible and able to work with legacy systems,” says Guo. Above all, the distributed ledger needs to be transparent.

There will be other obstacles. “Among the giants of payment processing like PayPal, Venmo and Stripe, a driving force has established itself for lobbying against digital currencies of the central bank,” says Guo. “FedCoin doesn’t need these intermediaries to send money. As these companies fall victim to innovation, it will be interesting to see how they try to protect themselves from disruption. ”

One way to resolve tensions could be to co-opt the private sector. As IMF economists Tobias Adrian and Tommaso Mancini-Griffoli have argued, an official virtual currency could be similar to Apple’s iOS operating system, on which commercial banks and e-money providers run apps. The Apple Health app may be fine for laypeople. An athlete wants something more challenging. Money could go the same way.

The countries must also cooperate with one another. Take the m-CBDC bridge. The 24/7 cross-border remittance project using central bank digital currencies was started by the Hong Kong Monetary Authority and the Bank of Thailand, but now the Central Bank of the United Arab Emirates and the People’s Bank of China have joined.

Many emerging market central banks might think they need to chain people up using a single virtual token that they issued to keep control of their nations’ money. However, this can only encourage mass migration into private cryptocurrencies, which are tied to a legal tender and are therefore less volatile. Diem, as the Libra Project formerly sponsored by Facebook Inc. is now known, could be one such stable coin.

Issuers of national currencies need to see themselves less as masters and more as service providers in a free market for digital money. Eventually, they will put their products in overflowing wallets, hoping we will like them more than some competing offer from another central bank. Those who lose the conspiracy could lose the loyalty of their citizens.

This column does not necessarily reflect the views of the editors or Bloomberg LP or its owners.

How to contact the author of this story:
Andy Mukherjee at

To contact the editor responsible for this story:
Patrick McDowell at

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Andy Mukherjee is a Bloomberg Opinion columnist specializing in industrial companies and financial services. He was previously a columnist on Reuters Breakingviews. He has also worked for the Straits Times, ET NOW, and Bloomberg News.

Read more opinion Follow @ andymukherjee70 on Twitter

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