Three catalysts are currently causing a fundamental reorientation of domestic and international monetary and payment systems: Facebook’s Libra, China’s central bank digital currency (the Digital Currency Electronic Payment (DCEP) system), and the COVID-19 pandemic. These catalysts stand in stark contrast to all previous disruptions and are the focus of our new paper.
First, and crucially, each catalyst is likely to have a systemic effect on domestic and international payment systems—and, for this reason, are ‘systemic catalysts’. Second, all three systemic catalysts coexist and are not spaced over time. Third, all three are mutually reinforcing—developments and regulatory changes affecting one will often directly impact the others.
Facebook’s announcement of Libra in 2019—its own cryptocurrency combined with a global digital payment system and digital identification system via Facebook/WhatsApp/Instagram Pay—was the first catalyst of sufficient scale and potential to lead central banks to utterly rethink their previous approach to sovereign digital currencies (SDCs).
Libra is a proposal by the private sector to move into the traditional preserve of sovereigns—the creation of currency—and thus was always likely to provoke a roll-out of SDCs by central banks. Then, a few months later, China announced its plan to launch the DCEP. However, despite the technical arrangements being in place following several years of work, the trials of DCEP did not occur until COVID-19 provided the final catalyst for China to begin the transformation of its domestic monetary and payment system. Trials of DCEP are currently underway in four Chinese cities.
When the Digital Yuan is fully launched, it will most likely be the first central bank digital currency (CBDC) from a major economy. Its launch will have significant international impact, since it will almost certainly trigger the acceleration, activation, or development of a number of similar projects around the world, both among those looking to engage with it and those seeking to compete with it. At the same time, the COVID-19 crisis is already forcing central banks and governments around the world to consider urgently whether they can and should develop and implement their own CBDCs. For example, a ‘Digital Dollar’ proposal was included (but not enacted) in the US legislative package of responses to the COVID-19 crisis in March 2020. CBDCs offer potentially large improvements in the capacity of a government to direct stimulus payments to citizens in nations which lack effective, up to date and comprehensive payment systems, such as the U.S.
Libra, the Digital Yuan and COVID-19 have each challenged policy makers and regulators globally. While Bitcoin and its progeny have been able to be safely ignored to date, global stablecoins (such as Libra) represent a real threat to existing payments infrastructure and a unique opportunity for payment systems to evolve. A broad roll-out of SDCs triggered by the Digital Yuan and COVID-19 is now likely across the globe.
In this context, we argue in our paper that most central banks should focus not on rolling out novel new forms of blockchain-based money but rather on transforming their payment systems: this is where the realizable, immediate benefits will lie both in the crisis and beyond.
We envisage three emerging design choices for such systems, reflected in centralized, decentralized and hybrid models, which will combine in various ways money and payment via technology and regulation. Looking forward, neither fully private alternative payment systems (APS) nor strictly public SDCs are likely to dominate.
Rather, as with existing payment systems, we expect hybrid models involving partnerships between the public and private sectors to most likely emerge in the wake of the three systemic catalysts. In these structures, monetary arrangements will remain dominated by central banks—particularly major economy central banks—with the private sector involved in various payment configurations. This hybrid SDC model will merge the monetary and the payment system in many cases, with the greatest potential benefits arising from both addressing the challenges of the COVID-19 crisis and supporting financial inclusion and sustainable development going forward.
Such a framework combines opportunities to support globalization through the creation of a common technological framework for money and payments at the international level but also the potential to fragment the global monetary and financial system into competing major currency blocks. Unfortunately, the latter appears more likely in the current environment with the potential emergence of a Digital Yuan, a Digital Dollar and perhaps other major economies’ SDCs.
For most governments, the greatest domestic benefits will be offered through fast payment systems. However, at the international level, it is clear that the advent of national monetary competition through major economies’ SDCs will be the defining development of the next decade.
Douglas W Arner is Kerry Holdings Professor in Law and Director, Asian Institute of International Financial Law, Faculty of Law, University of Hong Kong.
Ross Buckley is Scientia Professor, and the KPMG Law – King & Wood Mallesons Professor of Disruptive Innovation and Law at UNSW Sydney, Australia.
Dirk A Zetzsche is Professor of Law, ADA Chair in Financial Law (Inclusive Finance), Faculty of Law, Economics and Finance, University of Luxembourg.
Anton Didenko is a Research Fellow at the Faculty of Law, UNSW Sydney, Australia.