CBDC Weekly: Report Says CBDCs Can Outdo Crypto; Fed’s Powell Sees Role in Strengthening Dollar

The Bank for International Settlement has its “2022 Annual Economic Report” coming out next week and wanted to highlight its opinion of cryptocurrencies, releasing that chapter ahead of time on June 21.

Hyun Song Shin, the head of research and an economic adviser to the “central bank of central banks,” summed it up this way: “Our broad conclusion is captured in the motto, ‘Anything that crypto can do, [central bank digital currencies] can do better.’”

While central bankers should embrace the best of crypto’s innovations — notably tokenization and programmability — the BIS argued that both central bank digital currencies (CBDCs) and fast-payment systems are better foundations for these innovations than blockchain-based digital assets.

See also: BIS Says CBDCs Can Do Anything Crypto Can, but Better

Digging in, the BIS believes that CBDCs are structurally flawed — arguing that the cryptocurrency industry is too fragmented, not nearly as decentralized as it claims to be and hamstrung by its reliance on speculation. Beyond that, it said, crypto’s heavy reliance on dollar-pegged stablecoins to facilitate cross-blockchain trades and allow speculators to avoid volatility amounts is done by importing “the credibility of central bank money.”

It also has a core philosophical difference with crypto’s faith in decentralized systems that allow for “trustless” transactions that bypass the need to rely on a third party, like a bank with cryptography.

Which kind of makes sense for an organization owned by central banks.

Powell Gets Positive

Federal Reserve Chairman Jerome Powell said that a U.S. CBDC has the potential to “help maintain the dollar’s international standing” at a conference on June 17, marking his most positive — or perhaps least neutral — comment on a digital dollar to date, Reuters reported.

Read more: Fed Chair: CBDC Could Preserve Dollar’s Standing

One of the strongest arguments made in congressional debates over the need for a CBDC is that it would help maintain the position of the U.S. dollar as the world’s reserve currency and its primacy in international trade.

That said, a U.S. CBDC came under strong attack from the banking lobby last month, with the Bank Policy Institute warning that a digital dollar would “undermine the commercial banking system in the United States and severely constrict the availability of credit to the economy” — notably by disintermediating its members and gutting the deposits they rely upon to make loans.

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

The same benefits could be had from real-time payments systems and well-regulated — meaning bank-issued — stablecoins. Which is to say, about 180 degrees away from the BIS’ position.

EU Banks Aren’t Thrilled

Meanwhile, across the pond, the European Institute of International Finance (IIF) was not quite as forcefully opposed to a digital euro as U.S. banks are to a digital dollar.

See also: Bankers Urge EU to Proceed With Caution on Digital Euro

That said, it still called for a rethink of the European Commission’s position on a CBDC — which is technically undecided, but the European Central Bank (ECB) has been pushing aggressively for a digital euro as a way to fight the threat it believes stablecoins present.

An IIF official said that the U.S. is looking more at “if,” and the ECB is talking more about “how.”

Read more: EU Regulators Lash Out at Stablecoins While Boosting CBDCs

However, the CEO of investment banking giant UBS, Ralph Hamers, said that while it’s risky if not done right, a digital euro could be “fast and cheaper … [and] ensure that there is integrity and with that trust in the system that upholds the euro.”

Related: UBS CEO: Digital Euro Could Be ‘Fast and Cheaper’

The ECB’s point man on the digital euro, Fabio Panetta, told a conference on June 16 that the central bank has “been clear from the outset that we see financial intermediaries having a crucial role in distributing and promoting the digital euro,” adding that “by design, the digital euro will not crowd out existing private financial instruments. Rather, it will preserve the coexistence of central bank money and private money, supporting innovation by private intermediaries.”

Elsewhere, Panetta has proposed a $1.5 trillion digital euro cap with individuals limited to €3,000 to €4,000, in order to protect financial institutions from the disintermediation U.S. banks fear, Bitcoin.com reported.

CBDC Security Vital

Meanwhile, The Atlantic Council, a U.S. think tank, has warned that the cybersecurity of CBDCs “is one of the major challenges to overcome if a CBDC is to be issued in the United States.”

Its June 15 report, “Missing Key: The challenge of cybersecurity and central bank digital currency,” added that strong privacy protection could enhance security “because they reduce the risk and potential harmful consequences of cyberattacks associated with data exfiltration … and may generate and store less sensitive data in the first place,” it said. This would give hackers less incentive to hack the system — for personal data.

Additionally, the Hong Kong Monetary Authority and Bank of Israel are working with the BIS Innovation Hub in Hong Kong on a research project aimed at retail CBDC cybersecurity research, Ledger Insights said.

eNaira Won’t Require Smartphones

In an effort to expand financial inclusion, Nigeria is planning to make its eNaira CBDC useable on multiple phone types — not just on more expensive smartphones, but on feature phones via Unstructured Supplementary Service Data (USSD) codes which work much like SMS messages, Ledger Insights reported on June 13. It hopes to improve financial inclusion beyond its current 70%.

Meanwhile, it also said Japanese blockchain firm Soramitsu has been selected to study CBDCs by both the Philippines and Vietnam, in addition to Laos, with which it began working last year. Vietnam is targeting de-dollarization alongside concerns that the digital yuan, as well as AliPay and WeChat Pay, will bring the same issues.

Additionally, Coingeek reported that Bangladesh’s central bank announced plans to look at a CBDC as a way to push back against “risky” cryptocurrencies and stablecoins.

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