Algorand Adviser Says Digital Dollar Could Be Lifeline, Not a Threat to Banks

Commercial banks are calling a Fed-issued digital dollar an existential business threat, but they seem to be missing the point.

“The banks really should not see this as a threat to what they’re doing,” Co-Pierre Georg, a professor of financial stability studies at the University of Cape Town in South Africa, told PYMNTS. “Central bank digital currencies are throwing a lifeline to banks.”

Pointing to big tech companies’ growing move into banking services, Georg, who holds the South African Reserve Bank chair in financial stability studies at the university, said “the banks really have it backwards. They should be terrified of Big Tech.”

Just as central banks have seen blockchain-based, fiat-pegged stablecoins like Facebook’s abortive Libra/Diem project as potential threats to their control over their economies, banks should realize that if Libra had survived, “It would’ve been the end of banking as we know it,” Georg said.

“There would’ve been an entity that is not regulated like a financial institution, with 2.3 billion customers and more cash than the market cap of JPMorgan. How does any U.S. bank compete? They can’t.”

That’s something organizations like the Bank Policy Institute may be conveniently overlooking when tell the Federal Reserve that a central bank digital currency (CBDC), would “undermine the commercial banking system in the United States.”

See also: Heyday or Doomsday? Regulators, Banks at Odds Over CBDCs

The problem, he said, is that banks operate in walled gardens.

“They do products. They do not do infrastructure,” he said. “Banks should be grateful for being thrown a lifeline in terms of public infrastructure, on which they can all come together. They can all compete, but importantly, they can compete with tech companies.”

All Together Now

Georg is also a member of the economic advisory council of the Algorand Foundation, which is developing a fast, scalable, environmentally friendly smart contract platform to compete with Ethereum. And he said the infrastructure-versus-product perspective is what led him to the blockchain developer in the first place.

See more: Blockchain Series: What’s Algorand? The Blockchain Securing Transactions by Spreading the Wealth

“When you talk with a lot of the participants in the market, they look at the CBDC as a product that they can sell to central banks,” he said. “That’s not the right approach. If you build a product you end up having Facebook, while if you build infrastructure, you end up having the internet.”

That means sharing information in much the same way that the early developers of the internet and the World Wide Web Consortium (W3C) did, Georg added, noting that those groups had about 30 years to come up with the standards that made the web interactive. At the same time, he also thinks that too much can be made of the need for CBDCs to be interoperable from the get-go.

Just as early internet designers were able to come up with technologies make them interact, he’s confident that it will be possible to make protocols communicate — Algorand’s ability to do the atomic swaps that facilitate cross-chain transactions is a feature that attracted him, Georg added. This can be done either through banks — or implemented directly into the blockchain protocol.

Georg actually suggested that some countries’ CBDCs will have more than one ledger and one protocol, and not necessarily an interbank wholesale CBDC and a consumer facing retail one.

“You can have one retail ledger that is more expensive to participate, but that provides you smart contracts, and you can have one retail ledger that doesn’t have smart contracts, but has very high transactions per second,” Georg said. “As a central bank, you can operate both.”

The U.S. “has dozens of payment systems that coexist,” he pointed out. “You guys still print checks and stuff like that, for God’s sake.”

Real Time, Really Different

As far as blockchain, Georg said that another unnecessary fight is one in which some in the banking community see blockchain-based CBDCs as a competitor with real-time gross settlement systems like FedWire in the U.S., TARGET2 in Europe, and CHAPS Sterling in the U.K.

“Existing payment systems are working well,” he said, adding that they are inexpensive, reliable, and “have never failed as far as I know.”

But he added, what they don’t do is “facilitate some of the new innovations that we’ve seen from private crypto assets that require a decentralized ledger” like the tokenization of physical or digital assets.

Given crypto’s phenomenal growth, Georg said, it’s clear that there’s potential.

“If you can channel this into public infrastructure — well-regulated, maintained by trusted institutions — then this new kind of infrastructure can enable the new business models that are at the heart of the digital economy. And I think that’s where blockchain comes in,” he said. “You need a distributed ledger to make sure that there is no single point in this system where somebody can duplicate the data. And blockchain’s secret superpower is that it makes data unique.”

As far as potential, he pointed to “last iteration of payment systems that came about in the ’60s and ’70s, when digital payments were introduced.”

While the gains were mainly efficiency, Georg said, it resulted in the “emergence of more sophisticated financial products — derivatives, more sophisticated derivatives — that suddenly were possible because the technology enabled it.”

Blockchain, he said, “does enable new business models.”

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