This month the central banks of Australia, Malaysia, Singapore, and South Africa have started a new experiment: building a cross-border central bank digital currency system called “Project Dunbar”, under the auspices of the Bank for International Settlements (BIS).
The idea is to let institutions in those countries use cryptocurrency and distributed Ledger technology (DCT) to make cheap, instant payments in different currencies. And if Dunbar works – still a big “if” – this in our opinion will give a new twist to 21st century digital finance.
While some central banks, such as Bahamas, have tested domestic CBDCs (Central Bank Digital Currencies) and others, such as the Monetary Authority of Singapore and Switzerland, have tested domestic and cross-border settlement systems in one currency, none so far have tackled multiple currencies. The holy grail of central bank digital finance is to link different siles and currencies. Dunbar is not the only initiative attempting this: the central banks of Hong Kong, China, the United Arab Emirates and Thailand will soon embark on a so-called MCBDC bridge project with same aim, using different technology.
Should anyone who is not a central bank or crypto enthusiast care?
In our opinion ‘YES’ for the following four reasons:
First: these experiments show that while cryptocurrencies and distributed ledger technology (DLT) used to haunt the financial fringes, they are now going mainstream. So much so, that the US Federal Reserve (Fed) will report on its own efforts to build a dollar-CBD albeit just for domestic purposes.
Second, the mushrooming of central bank experiments in our opinion shows that a furious tussle is underway in the bowels of finance. Private sector entrepreneurs are racing to determine with computing solution will deliver DLT in the most secure and sealable manner creating a proliferation as products, such as Ethereum, Cardone, Solana and Polka dot.
Central bank officials are grappling with tough policy choice as they peruse the tech option, such as how to retain centralized ledgers and of course control if they embrace elements of DLT. Some are testing their ideas with private sector partners. MAS for example has worked with JP Morgan; DBS and ConsenSys, a software provider have focus on ethereum. Others like the Fed, are using proprietary tech. But we at Calvin • Farel believes that CBDCs are so important in the future that neither governments nor central banks can outsource the production of CBDCs to the crowd.
Either way the acronym “CBDC” can refer to a broad spectrum of models, and none of these in our opinion dominate yet. The main issue is how to interconnect and how to generate a network of CBDCs with different governance and connectivity models for cross-border transactions. But in our opinion, there are lots of ways to do this.
Third, Asia is leading much of this innovation. That is partly because China is racing to develop a digital yuan to boost its global power, and the People’s Bank of China is ahead of most rivals in this respect. However, the central banks of Singapore and Hong Kong are in our opinion moving fast too. Therefore, Asia is definitely leapfrogging other regions since there is more appetite for tech and less legacy systems. Smaller governments seem to recognize that this new technology is a great opportunity to challenge the west.
The Fourth- and arguably most important point in our opinion which has emerged around Dunbar is that the immediate impact of CBDC experiments might not be felt in the world of crypto and DLT. It seems very unlikely that CBDCs will be an effective form of money for retail finance anytime soon. Traditional systems, such as credit cards, mobile phone banking- or even paper money-are still speedier. And while DLT can already be effective for some. Corners of wholesale finance, the applications are limited since this part of tech is still clunky. But that might change fast. Even before that happens, the debate around CBDCs and private sector experiments, by groups such as Facebook, is prompting legacy operators to scramble to ward off the looming competition. Singapore in our opinion is a case in point: domestic banks have raced to make existing mobile phone banking services more efficient, user friendly and cheaper, having introduced cross-border payments with countries such as Thailand in three clicks.
Therein lies perhaps the biggest reason to watch Dunbar and its ilk. Anything which raises expectations that payments can be fast, instant, and cheap in our opinion is a good thing. So, it CBDCs can shake up the sometimes-sleepy finance cartels, we should all cheer. And celebrate the principle that economist Adam Smith championed three centuries ago: competition is a wonderful thing for spurring innovation-and growth.