The year 2017 was a boom in the crypto market, the year 2018 was a mania of ICO, the year 2019 was a strong development of DeFi and an increase in the interest of governments to regulate the cryptomarket. The year 2020 will most likely continue both trends. While the development of DeFi should remain undisturbed and accelerate, a bloody battle may begin in the regulatory field. It will be unleashed by the central banks, which are feeling the breath of the cryptocurrenciesfollowing them more and more on their necks. After all, this is the first time ever that we have real competition for fiduciary currencies. How will it all end? Who will emerge victorious from this clash between David and Goliath? Will history go round?
Regulations, regulations, regulations
A year ago, many people predicted that 2019 would be the year of regulation in the cryptographic sector, based on the increased control we saw in 2018 after the boom and collapse of the ICO in 2017. Governments were finally going to take on the cryptocurrencies and that’s what happened. 2019 did not disappoint: from Switzerland to Korea, France and Lithuania there were proposals to regulate cryptographic assets. At the end of the year, China, which in 2017 banned ICO and crypto but promoted blockchain technology, quickly cracked down on unregulated stock exchanges. Meanwhile, the U.S. Securities and Exchange Commission imposed a fine or reached a settlement with those ICOs that had not registered as securities. In this context, Facebook announced the Libra project, which triggered a greater global response than anything we have seen so far in this sector. The G7 established a working group on Libra and other stablecoins. France and Germany discussed a ban on the use and use of the Facebook project in their jurisdictions. So we can see that the attitude of governments has changed from passive to favorable or blocking.
A competitor from Silicon Valley
Libra’s introduction included the concept of “sovereign” mainstream digital currency. Although it differs significantly from the digital currency issued by the central bank (CBDC), Libra, if activated as originally intended, may become a major alternative payment mechanism to the traditional fiat currency system, perhaps more so than cryptic currencies such as Bitcoin. Facebook has been trying to enter the payment area for many years. By adjusting its current portfolio assets (including WhatsApp and Instagram), billions of global users, as well as announced consortium partners, Facebook would be able to achieve a larger scale of payments and create new sources of revenue without officially becoming a bank.
CENTRAL BANKS ARE UNDER FIRE AND NEW TECHNOLOGIES ARE UNDER THREAT, JUST AS STREAMING TV THREATENS THE CLASSIC ONE.
Thanks to Facebook, central banks have suddenly noticed the threat that a digital currency supported by private entities would pose to their business model. Central banks use monetary policy to manage their economies by controlling inflation and credit and, increasingly, cross-border trade. If the independent currency were to benefit from greater use than the central bank’s fiat currency, central banks’ ability to use monetary policy as a tool to steer monetary policy would be significantly reduced.
Following the announcement of Libra, China accelerated the development of its own CBDC, even announcing major local partners such as WeChat. Leading Chinese politicians and bankers have probably been planning the details of introducing their own digital yuan for months. The deputy director of the People’s Bank of China said in a recent interview:
The motivation for the introduction of digital currency is to protect our monetary sovereignty. Other countries and regions, including other BRIC countries (Brazil, Russia and India), have made their own statements.
Countries’ interest in digital currencies is driven by two factors. First, they provide central banks with the ability to track the currency accurately (cash flows are much more difficult to track). Second, central banks can reduce reliance on dominant currencies, including the US dollar.
The alternatives are particularly attractive to emerging and developing countries. Since the recession in 2008, many countries, including Switzerland, have been suffering from challenges that have increased the US link to the dollar used as a global reserve currency for the banking sector. If countries were to issue digital currencies, they could theoretically settle transactions directly without the involvement of another (indirect) currency, which is currently the US dollar most often. India, for example, is worth watching closely. They have banned banks from any relationship with banking companies related to cryptocurrency companies, but have publicly confirmed reports of exploring the possibilities of creating digital rupees.
The currency is not equal to
Digital currencies are not always cryptic. This distinction is very important. A digital currency is simply a currency issued by an entity in digital form. In the case of the CBDC, this bank is the central bank. On the other hand, crypto such as Bitcoin are not issued by the central authority and rely on a network of decentralised miners to issue the currency and verify transactions. So we can say that Bitcoin is both a digital and cryptic currency. By contrast, the digital yuan would only be a digital currency because of its centralised nature.
While the implementation and spread of CBDC and other digital currencies can make cross-border transactions and consumers’ lives easier, they will also facilitate better tracking of transactions and tighter control. Ironically, the increased global demand for decentralised cryptocurrencies, as well as the interest in decentralised finance, which gained ground in 2019, may have awakened central banks that they are threatened by new technologies.
After all, using Bitcoin is not so easy to find out who sent the money to whom. Just as Netflix disrupted Blockbuster and Amazon disrupted Barnes and Noble. In 2020, we will be able to observe how the cryptographers will disrupt the central banks. The only problem is that it will probably be David’s fight with Goliath. Fortunately, we all know how it all ended.