Op-ed: A new global arms race in digital finance is heating up
Today, we're on the precipice of what could be the largest transformational period in global history. With the first Industrial Revolution, new technologies like assembly lines, factories and transportation fundamentally changed society. This time, instead of cogwheels doing the work, blockchain-based digitalization will continue to drive transactions. Specifically, this latest phase of progress has its sights set on a massive industry ripe for disruption: finance.
Digital finance and the monetary system is leveraging decentralized blockchain technology to modernize financial markets. Dominant players in these systems include the world's biggest financial institutions and global central banks.
The rise of digital currencies and CBDCs
As tokenization is an inevitable trend, central bank digital currencies (CBDC) are surging in adoption, since they are simply one kind of a more generalized digital asset, albeit one that is bound to risk-free central bank money. The global rivalry in digital currencies is heating up as central banks from an increasingly wider swath of countries, including China, Hong Kong, Thailand, the EU, U.K., U.S., and Australia, explore potential use cases for tokenized money.
CBDC is the first place where we see top-down adoption of distributed ledger technology (DLT) from central banks and governments. The adoption of CBDCs will drive significant DLT ecosystem innovation and development that will impact financial organizations. The widespread adoption of DLT will extend beyond finance to other industry verticals like security, supply chains, healthcare, retail and ecommerce.
CBDCs will certainly make payments, settlement of deals and trading simpler, especially when it comes to global trade. It will also potentially change the role current institutions are playing regarding money and payments. CBDC implementation will also possibly make cross border payments simpler and much cheaper. One result of that will be the enablement of micropayments, allowing small businesses to be more competitive and eliminate the need for aggregators in order to make them economically viable, resulting in a different distribution of value.
Winners and losers are made from historic periods of societal shifts and advancements. The U.S. was obviously a dominant force during the first revolution. As the world embarks on a new transformational journey, who is driving it? The answer to this question is very complex and currently unclear, but there is an intense financial technology "arms race" brewing between the world's superpowers for dominance in digital finance infrastructure and technology, spurring short-term competitive innovation with critical long-term implications.
"I believe that if America does not lead innovation in the digital currency and payments area, others will," David Marcus, head of Diem, the cryptocurrency project founded out of Facebook, said in a statement to the U.S. Senate Committee on Banking, Housing and Urban Affairs.
Huw van Steenis of UBS said there will be a "three-horse race" around the future of money with private tokens and CBDCs developing in parallel with efforts to improve the current system. The implications of winning or losing the digital finance "arms race" are massive and far-reaching.
During the U.S. and USSR space race, NASA harnessed tremendous intellectual and technical capital to enable the moon landing and further space exploration, leading to a variety of spinoff inventions, from global positioning systems (GPS) to advances in flight technology to Velcro and even freeze-dried food. In the same way, blockchain-based digital finance technology is a means to the end of greater technological sophistication.
The three leaders in the digital currency arms race
More than 80% of the world's central banks are exploring their own versions of digital currencies, but it's China, the U.S. and the EU that have the resources, technology and infrastructure to determine the future of the digital economy. 2020 started with a major event within the financial world: the World Economic Forum in Davos, where the WEF released a toolkit for policymakers regarding the creation of CBDCs.
China is currently testing its digital yuan with a feature allowing people to send money to each other by simply touching their smartphones together. This particular effort is just one of many digital currency trials China is conducting across the country. These coordinated activities, in combination with their leadership in the crypto ecosystem (accounting for nearly 90% of trading volumes and hosting two-thirds of bitcoin mining operations), is giving China somewhat of an advantage.
Leveraging that first-mover advantage, China has ambitious plans to leverage U.S. innovation and its own digital currency to someday dominate other world currencies. As a purely aspirational endeavor, the jury is still out on whether they can actually achieve this goal.
Regardless, China is creating a significant advantage in this global race on CBDCs by investing in the technology and experimenting at a very fast pace. Even in the most isolated and underdeveloped areas, most people already use electronic forms of payment, like WeChat Pay, almost exclusively. We will continue to see advancement from China with regards to the digital yuan, where it's currently enjoying a first-mover advantage over other digital currencies.
China has made the digital yuan a public priority, and it has an ambitious goal of competing with the U.S. dollar by creating a digital Asian alternative. China will be able to track and control the movement of money in and out of the country, which is much easier to do with a digital yuan. Given its political structure, China is able to move faster than the U.S. or Europe in implementing such changes.
Europe is in a strong position to create a CBDC, but unlike attempts by smaller, individual countries like Sweden, the size and scale of an EU digital currency would be sustainable long-term and could compete at scale. The European Central Bank is discussing launching a consideration phase for a digital euro this year and launching a digital euro is at least a five-year plan.
The U.S. continues to lead in the innovation, regulation and implementation of blockchain-based digital securities, banking, payments, insurance, etc., but may not be as far along as others when it comes to CBDCs. Over the last decade, American innovators have built compelling innovations in blockchain, digital currency and cryptocurrency aimed at revolutionizing finance and creating new US tech superstars. And, as these technologies advance, they're innovating industries beyond just finance, including retail, cybersecurity, supply chain management and so many more.
Tech leaders in the space like Securitize are paving the way for widespread adoption and access to liquidity by building the mechanisms for the industry to take hold. The benefits of CBDCs will propel the U.S. implementation of a digital dollar. The release of CBDC is not just a technical change, but it's also the revamp of a financial system that is centuries old. US policymakers should continue to foster US leadership in technological financial innovation and ensure that the American people enjoy its benefits first.
"The United States usually wins when we unleash the power of our innovative, dynamic private sector, with the government setting the rules rather than building the products," said Brian Brooks, former acting comptroller of the currency of the U.S. Treasury Department's Office of the Comptroller of the Currency. "But either way, given the intense focus of other countries in this area, let me say that because of the important role of the US dollar, we need the United States to step forward on this field."
The future of finance
What happens with CBDCs will have far-reaching implications on the future of digital finance, including cryptocurrency and digital securities. Much like the space race didn't just put a man on the moon, but also catapulted the invention of important ancillary technologies, CBDC and DLT adoption will influence the forward-moving progress of every industry. There will be an exponential amount of innovations resulting from this digital finance arms race that we don't even know about yet. The possibilities are endless and we're just at the starting line.
Whoever leads this race and determines the outcome of its infrastructure and operation will most certainly gain a significant advantage and may have the possibility to spearhead many of the other innovations that come from this technology. The conversation of this tech competition between countries was even brought to the US Senate. China is far ahead in implementing real digital finance and currency programs as we speak, giving them a first-mover advantage in something as simple as experience.
The US and its regulatory bodies are still the gold standard and will ultimately set the pace and the rules. US-based innovators continue to roll out viable solutions, but which powerhouse will roll out the standard solutions first to control the space and our digital economic destiny?
—By Tal Elyashiv, a serial entrepreneur, is founder and managing partner of SPiCE VC, which funds early-stage companies.
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