The growth of crypto-assets, stable coins and decentralised finance (Defi) is ramping up pressure on global central banks to develop a government-backed digital currency.
“The challenge of decentralised crypto and particularly the challenge of tokens issued by big tech platforms has led to a significant increase in the last 12 to 18 months of central banks warming up to CBDCs,” said Ronit Ghose, global head of banking, fintech & digital assets at Citi, while speaking during Copenhagen Fintech Week.
“Just like with many commercial bankers, central bankers look at decentralised crypto and feel [it] as an existential threat. Why? Because they are the guardians of the existing rails. This is a whole new system of rails.”
At the Eurofi Forum last week, Benoît Cœuré, head of the Bank of International Settlement Innovation Hub, called on central banks to accelerate their CBDC work in the face of this “existential threat.”
“Big techs are expanding their footprint in retail payments,” he said. “Stablecoins are knocking on the door, seeking regulatory approval. DeFi platforms are challenging traditional financial intermediation.”
“The time has passed for central banks to get going. We should roll up our sleeves and accelerate our work on the nitty-gritty of CBDC design. CBDCs will take years to be rolled out, while stablecoins and cryptoassets are already here. This makes it even more urgent to start.”
The growth and adoption of ‘digital first’ money is expected to drastically change finance.
“Programmable decentralised and centralised digital money is going to significantly change the existing financial system,” Ghose said.
However, digital-first money is not expected to replace existing e-money, but rather help to compliment it.
“Our belief is that this new form of money, digital money 2.0; private sector, decentralised cryptocurrencies and centralised CBDCs will grow significantly over the next decade. But it will coexist with the existing form of e-money, or digital money 1.0.”
Central banks around the world are at various stages of development for their respective CBDCs. China is in the early stages of a pilot test, while the European Central Bank is in the investigation phase. The US Federal Reserve is expected to publish its much-anticipated discussion paper on a digital US dollar this month.
“A CBDC’s goal is ultimately to preserve the best elements of our current systems while still allowing a safe space for tomorrow’s innovation,” said Cœuré. “To do so, central banks have to act while the current system is still in place – and to act now.”