Geopolitics seems to have found its way into the world of digital money, in the sense that China and the US have staked out positions on the future of tokenized currencies which are entirely at odds with each other.
Beijing’s strategy is state-oriented, and is shaped around the e-CNY, China’s central bank digital currency (CBDC). Crypto mining and trading were banned there in 2021.
Washington’s strategy, by contrast, is private sector-oriented, using regulatory tools to create a culture friendly to the growth of cryptocurrencies, including stablecoins (online tokens that are collateralized dollar-for-dollar by safe assets in an underlying fiat currency). There is no room for CBDC here: US federal agencies are ‘prohibited from undertaking any action to establish, issue, or promote’ one.
At one level, there’s little to remark on here. After all, the international monetary system accommodates all kinds of national differences when it comes to fiat currencies. Some, like the dollar, are fully convertible; while others, like the renminbi, are subject to capital controls that restrict how they flow across borders.
If different flowers can bloom in a fiat currency world, then shouldn’t the digital world also be able to live with diverging ways of conceptualizing online money?
To some extent, yes. But its infancy means that the digital money universe remains highly unsettled. Although it is widely agreed that digital money (especially in its blockchain-based forms) offers the attractions of highly efficient, secure and instantaneous settlement, debates rage about many fundamental issues.
These include whether stablecoins – by far the fastest-growing part of this new monetary universe – should pay interest, and how their issuers should be regulated; indeed, whether stablecoins should be done away with altogether in favour of tokenized bank deposits or a CBDC; whether CBDCs should be mainly retail or wholesale; how to deal with criminal behaviour in crypto networks; and whether digital money should flow across private blockchain networks or open, permissionless ones.
Within a digital currency ecosystem that is still in flux, the US and China risk limiting their room for the broadest kind of innovation by pursuing narrow strategies.
Europe’s hybrid approach
In principle, this could be to the benefit of European Union which, overall, has embraced both a CBDC and crypto assets. A digital euro issued by the European Central Bank (ECB) could be with us in 2028, pending European parliamentary approval. And the European Commission can boast that its Market in Crypto-Assets Regulation (MiCA) framework comprehensively sets rules for digital asset issuers and service providers in a way that should facilitate innovation without threatening financial stability.
Not everyone agrees. Tether, by far the world’s biggest issuer of stablecoins, has walked away from Europe, claiming that MiCA is too restrictive about the kinds of assets that an issuer needs to hold as collateral for its coins. Other issuers feel the same way.
Indeed, the unhappiness of the stablecoin issuers is only matched by that of the ECB, which would rather that stablecoins didn’t exist at all. For the ECB, the risk is that stablecoins – whose stock might reach $2 trillion in 2028, from around $250 billion currently – will undermine the ‘strategic autonomy’ that the ECB seeks in introducing a digital euro. Its view is that this autonomy can only be provided by the digital euro itself, and by keeping tokenization within the banking system.
Otherwise, the ECB worries that ‘alternative foreign payments solutions’ could lead to excessive dollarization in Europe, undermining monetary sovereignty. Think about the current dominance of the dollar-based stablecoin issuers, for example, or the potential growth of PayPal’s stablecoin. These fears are almost certainly unwarranted, but they are not the only source of anxiety: the ECB also worries that these coins will draw money away from the banking system, reducing the stock of deposits and hence limiting the supply of credit.