Over the past several years, the Group of 20 (G20) has increasingly had its eye on cryptocurrencies. However, until recently, G20 seemed to view and engage with crypto and blockchain technology from a distance.
The group, which is an international organization of central bank governors and finance ministers from the EU and 19 countries spread across the rest of the globe, has continuously stated that cryptocurrencies do not present a threat to monetary stability and urged cryptocurrency exchanges to collect appropriate data from their users.
Notably, G20 did not ever meaningfully discuss how the application of cryptocurrency and blockchain technology may apply to traditional financial systems until now.
Earlier this week, G20 announced that it is working with the International Monetary fund (IMF), the World Bank, and the Bank for International Settlements (BIS) to complete regulatory frameworks that would formalize the use of a central bank of digital currencies (CBDCs) in traditional banking systems.
Specifically, the G20 Financial Stability Board (FSB), which was formed after the 2008 financial crisis, said that the effort will “examine the scope for new multilateral platforms, global stablecoin arrangements and central bank digital currencies to address the challenges that cross-border payments face without compromising on minimum supervisory and regulatory standards to control risks to monetary and financial stability.”
The announcement said that the frameworks, along with research on CBDC designs, would be ready by the end of 2022; the IMF and the World Bank are expected to have the technical infrastructure to facilitate CBDC transactions involving the countries by the end of 2025.
Why is this happening now? And what does this mean for the future of cryptocurrency and the world?
”Financial Regulation Has Historically Been Dependent on Physical Jurisdiction.”
The G20’s announcement may represent the first time that countries have worked in a meaningful way to form an international regulatory framework for any kind of blockchain-based financial technology.
Meltem Demirors, chief strategy officer of CoinShares, told Finance Magnates that “policymakers have long struggled to regulate cryptocurrencies in a uniform manner.”
Indeed, “financial regulation has historically been dependent on physical jurisdiction, which is challenging to define in the world of digital assets and in an environment where teams are increasingly remote and working in a distributed manner, or perhaps even pseudonymously via open source communities where bitcoin was first introduced by Satoshi Nakamoto 11 years ago.”
While this may be the first real coordinated international effort to regulate crypto, there seems to be evidence that countries are independently taking cryptocurrency more seriously as a regulatory issue for some time.
For example, “in the US, the OCC recently declared that commercial banks could custody digital assets, which paves the way for the traditional banking sector to participate in this emerging trend,” Meltem pointed out.
However, the push for regulation has not necessarily come from regulators themselves: “it is most likely that in Europe and in the US, private companies will lead the way while regulators work to coordinate their approach and develop national or supra-national CBDC regimes.
“[…] Regulators have tended to move slowly when it comes to new technology, as evidenced by the Fed’s faster payments initiative which is expected to be implemented by 2024.”
“CBDC Adoption Is No Longer Hypothetical, It Is Happening Here and Now.”
Despite the slow pace of regulation, particularly when it comes to international initiatives, Meltem Demirors told Finance Magnates that the timing of G20’s big step toward creating CBDC infrastructure was not exactly unexpected.
“It is not surprising that the G-20 is moving to issue guidance, as every major economy in the world has put out statements regarding their exploration of a central bank digital currency,” Meltem Demirors said.
Indeed, earlier this month, the European Central Bank (ECB) published a 50-page report examining the possible exploration and implementation of a ‘digital euro’; a separate report by the Bank for International Settlement (BIS) on CBDCs was also recently published in conjunction with seven central banks.
Beyond that, CBDCs have been a topic of conversation in and out of the cryptosphere since China announced it would be working on a nationally-issued CBDC several years ago.
“China’s rapid progress in this arena and the proliferation and use of crypto-native stablecoins in global financing flows is creating more urgency for a unified framework,” Meltem told Finance Magnates.
Indeed, China’s progress on the creation of a CBDC, and the subsequent CBDC initiatives by other nations, means that “CBDC adoption is no longer hypothetical, it is happening here and now, and it is happening on a massive scale,” she said.
In fact, “over the last few weeks, China’s Digital Currency Electronic Payment project, or DCEP, has accelerated significantly. This week, it was announced the system would be used to distribute $1.5M of renminbi to 50,000 Shenzen residents as part of a series of trials preparing for the launch of digital renminbi.
“It is highly likely that over a billion Chinese consumers will be transacting in DCEP long before a central bank digital currency becomes mainstream in any other country.”
“Central Banks Will Need to Consider Critical Security Issues First and Foremost.”
Indeed, the fact that the Chinese government has already been working on issuing a national digital currency seems to indicate that China may have already found answers to many of the important technical and regulatory questions that other nations are only just starting to ask.
For example, what will the technical infrastructure of (presumably) interoperable CBDCs look like?
Maurizio Raffone, Chief Financial Officer at Credify, told Finance Magnates that while he does not have any specific predictions for what CBDC tech will be, “I don’t see today an off-the-shelf tech stack that can ensure all the technical requirements of a CBDC.
“Central Banks will need to consider critical security issues first and foremost, to ensure protection from hacks and from errors in the ledger’s code itself,” he said, “and which piece of code has ever been written error-free?
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“Given the amount of transactions that the ledger of a CBDC will need to handle, perhaps we’ll see further development and ultimately adoption of a directed acyclic graph-based ledger.”
Nations May also Be Facing Some Competition from Private Companies
The race to create national digital currencies does not only involve nations competing against one another. Instead, nations are facing the fact that they may find themselves competing with private companies for control of the currencies that are used in their nations.
CoinShares’ Meltem Demirors specifically mentioned crypto-native stablecoin Tether, “which has $15B in circulation and a daily velocity of 2-3x.”
However, concerns over growing usage of USDT are far outweighed by concerns over Facebook’s Libra, which escalated the global conversation on CBDCs to a fever pitch when it was announced in mid-2019.
Indeed, when the project originally launched, the plan was to create Libra Tokens that would be tied to a ‘basket’ of fiat currencies and traded on a global network.
Regulators, concerned that the project could absorb large parts of the global financial system, stalled the project; eventually, Libra changed its plans. Earlier this year, it was announced that the network would be redesigned to support existing government-backed currencies, like the US dollar and the euro; the Libra Token would play a much smaller role in the network when (and if) it is launched.
Regulators Are Looking into the Future with Plans to Keep Privately-Issued Stablecoins in Check
Still, while the threat that Libra apparently seems to pose in regulators’ eyes may have been abated, regulators are increasingly wary of similar projects that may appear in the future.
In addition to the G20’s CBDC announcement, the Group of 7 (G7), a group that consists of leading financial officials from the world’s seven largest economies, published a draft statement in opposition to global stablecoin projects led by private companies more generally.
“The G7 continues to maintain that no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory, and oversight requirements through appropriate design and by adhering to applicable standards,” the draft said.
Todd McDonald, the co-founder at global blockchain firm R3, told Finance Magnates that “it’s no surprise to hear more regulatory opposition to Libra, but the nuance here is that the G7’s statement refers to ‘global stablecoin projects’.
“In this case, this is clearly code for Libra, but we must not lose sight of the more generic distinction,” McDonald said.
“CBDCs Are a Double-Edged Sword.”
Therefore, nations that want to stay competitive on a global scale have been put in a position of needing to innovate and quickly.
However, the implementation of CBDCs on a wider scale raises some important questions on privacy and human rights; questions that have not yet been adequately addressed by regulators.
CBDC expert Hugo Renaudin, chief executive and co-founder of institutional crypto exchange LGO, told Finance Magnates that indeed, “CBDCs are a double-edged sword.
“On the one hand, they can help create a more transparent and flatter financial system, where peer-to-peer payments are easy and accessible to anyone with fewer and fewer middlemen. A financial empowerment tool,” he explained.
“On the other hand, they can be an instrument of oppression by governments: the ability to monitor any payment, to block them, to censor people and businesses that cannot receive money. This will all depend on how governments and central banks choose to build these currencies.”
Effects on the ‘Traditional’ Cryptocurrency Space and Societal Implications
These important structural differences between CBDCs and traditional cryptocurrencies mean the effect of CBDC regulation on the crypto space as we know it is rather unpredictable.
For some, the effect could be positive: John Deacon, financial services lead at cybersecurity and cryptography group, Dragon Infosec, told Finance Magnates that “the point at which digital versions of fiat currencies are created and used is the point at which digital assets move into the mainstream, with added familiarity amongst the populace potentially leading to exponential growth in the usage of non-CBDC digital currencies.”
Maurizio Raffone also commented that “the announcement itself is a further boost to the credibility of distributed ledger technology.
“The crypto markets will surely benefit from a positive spillover effect” of CDBC activity, Raffone explained. “This positive momentum will further support financial institutions’ investments in this technology, as Central Banks will have to work with banks in order to manage their CBDCs effectively.”
Still, he acknowledged that CBDCs are not cryptocurrencies, and that therefore, “with regards to retail participation in crypto, underlying instruments like Bitcoin or Ether have very little in common both technically and economically with a CBDC that I don’t see particularly strong support from this news.”
”The Proliferation of CBDC Efforts Further Highlights the Fundamental Difference between National Currencies and Cryptocurrencies.”
Indeed, CoinShares’ Meltem Demirors commented that “if anything, the proliferation of CBDC efforts further highlights the fundamental difference between national currencies and cryptocurrencies, and their very different uses.
“One of the primary features of cryptocurrencies like Bitcoin is the inability for any single actor, like the state, to control the code, the network, or the asset itself. CBDCs are in fact the opposite, and are controlled by the state in every sense of the word,” Meltem said.
Indeed, while “many retail and institutional investors view bitcoin as a hedge against national currencies, especially in an environment with unprecedented money printing, high target inflation, and zero to negative interest rates,” CBDCs will play a very role, Meltem said.
“CBDCs will enhance the ability for governments to exercise control and censorship over transactions at all levels, and in many cases, are also being coupled with a push against the application of end to end encryption in consumer and institutional applications.”
The quotes in this article by Meltem Demirors, chief strategy officer of CoinShares, were previously and erroneously attributed to “a spokesperson from CoinShares.” Finance Magnates apologies for the mix-up; special thanks to Meltem and to CoinShares.
Traduction de l’article de Rachel McIntosh : Article Original