PayPal announced this week that they are enabling customers to buy, hold and sell cryptocurrency on their platform. Although the news was cautiously received for several reasons, it’s just one symptom of the dash for digital currency which is gathering speed around the world. I expected that PayPal would eventually throw their hat into this ring. After all, in the years of development between the emergence of cryptography techniques for digital currency (Merkle and Chaum in the 1970s and 1980s) and the Bitcoin white paper in 2008, Paypal was one of many projects aiming at the holy grail of peer to peer cash. They evolved into the ubiquitous payment platform, of course, but this step to add crypto to their options comes as no surprise. There are many caveats, not least that users seem to be expected to buy crypto within the platform, any payment will be converted back into local currency for the recipient, and PayPal holds the keys. It’s a jump for the passing bandwagon, a crucial step to avoid being left behind.
Central Bank Digital Currency
The arrival on the scene of the Libra consortium in June 2019 started the race. Faced with the idea of Facebook’s 2.7 billion users getting their hands on an accessible non-sovereign digital currency, central banks who had been toying with the idea stepped up a gear. They recognised that to maintain the effectiveness of central bank currencies within fiscal policy, they needed to join the digital gang. Enter the Central Bank Digital Currency, or CBDC.
While Bitcoin and other truly decentralised cryptocurrencies such as Ethereum can be said to have systematic stability, what interests banks is financial stability and control. Strictly speaking, central currencies – fiat currencies – actually fluctuate against Bitcoin. They are controlled to give us financial stability, the comfort that a loaf of bread is worth the same today as it was yesterday. Consumers in countries that have lost control of their central currencies do not have this luxury, as anyone living in Zimbabwe or Venezuela will confirm. There is a rapid and determined movement to establish CBDC in many countries, and we expect that they will arrive in our lives as soon as 2025.
The Bank of England expressed interest in the concept in 2018 and they are clear about the benefits – one of which is that by issuing a digital pound themselves, it will prevent others from doing so. Consumer protection, privacy and security are clear concerns. CBDC will help the bank to provide a resilient payment infrastructure, particularly for cross border settlements (which was probably the impetus for PayPal’s move). The bank also recognises the needs of the emerging digital economy and the real decline in cash use which has been accelerated by Covid. Availability of central bank money 24/7 is also attractive. Crypto never sleeps.
There are other concerns to be addressed including digital exclusion, which still blights a surprisingly large proportion of our population in the UK. Unlike Asia or Africa where people are comfortably using WePay, AliPay and MPesa for mobile to mobile payments, our culture is bank-centric. To make a digital currency inclusive here, everyone needs to be online and have access to affordable banking services. It would be fantastic if a shift towards CBDC was the impetus needed to improve lives.
Who else is experimenting?
The list of emerging CBDC projects is long. The Digital Euro project is due to launch in 2021, and Estonia is heavily involved. The Estonian expertise in cryptography and blockchain applications is unparalleled and the country has already investigated CBDC along with their early work on digital identity. South Korea announced that they would be issuing bonds managed on blockchain, which would need a cryptocurrency in place to operate, and a pilot is expected in 2021. In China, the digital Yuan has already racked up over three million transactions in trials. In Japan, Line, a private company, is building infrastructure which would underpin a CBDC. Canada released a report within the last few weeks looking at the viability of CBDC, a first step, and France is reportedly working with Tezos to develop a proof of concept.
This global activity makes it clear that the dash for digital currency is well and truly on. This is going to be some race to watch.
You can read more about the origins of cryptocurrency in Blockchain Hurricane: Origins, Applications and Future of Blockchain and Cryptocurrency. Order your signed copy today – Bitcoin accepted.