Will a CBDC be private?
Here is our pick of the 3 most important Stablecoin news stories during the week.
How private should a CBDC be? China has already made all of those design decisions, its CBDC will be centrally controlled, managed and linked to your identity. But what will the West decide?
First, an argument for preserving the privacy of physical cash when in Digital form from a recent ex-CFTC Chair in the USA.
“If a “digital” US Dollar fails on privacy rights, it will lose its position as the global reserve currency, full stop.” In other words people will stick with Bitcoin or not adopt the Digital Dollar and the USD will be in danger of losing its reserve currency status.”
Meanwhile in Europe, the ECB are looking at the benefits of central control. That is the Central Bank can directly encourage you to spend your money benefiting the economy rather than save and merely benefiting yourself. European Central Bank Executive Board member Fabio Panetta said a digital euro might be the innovation that sees negative interest rates passed directly to consumers.
Private Enterprise companies also want in, besides Tesla’s announcement this week of its 1.5 USD Billion purchase of Bitcoin and Bank Of New York Mellion’s announcement that it is setting up a Digital Assets team, PayPal promoted itself as a suitable distributor and could be to central bank digital currencies (CBDCs) what private banks are to physical dollars.
The combination of individual privacy and private company delivery in the Ethereum world of DeFi is also gaining momentum. This excellent prima from the Fed outlines the rapid rise of DeFi, the opportunities and some of the risks. The abstract sums it up:
“The term decentralized finance (DeFi) refers to an alternative financial infrastructure built on top of the Ethereum blockchain. DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, interoperable, and transparent way. This article highlights opportunities and potential risks of the DeFi ecosystem. I propose a multi-layered framework to analyze the implicit architecture and the various DeFi building blocks, including token standards, decentralized exchanges, decentralized debt markets, blockchain derivatives, and on-chain asset management protocols. I conclude that DeFi still is a niche market with certain risks but that it also has interesting properties in terms of efficiency, transparency, accessibility, and composability. As such, DeFi may potentially contribute to a more robust and transparent financial infrastructure.”
So in summary, how private your money is and how involved the private sector is in this new money ecosystem is still very much a live debate in the West, whilst in China they are progressing much faster and with more focus. Will it be another Hare and Tortoise race, where first mover does not translate to an advantage in the longer run?
Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years.
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