GiD Report#196 — How crypto is changing central banks

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GlobaliD

6 min readJan 25, 2022

Welcome to The GiD Report, a weekly newsletter that covers GlobaliD team and partner news, market perspectives, and industry analysis. Check out last week’s report here.

This week:

The Fed finally publishes its paper on CBDCs
The web3 wars continue
Tweet of the week — IG NFT edition
Stuff happens

1. Better late than never

There are already 23 countries already experimenting with CBDCs or central bank digital currencies — 9 of which have already officially launched, including Nigeria. In China, WeChat recently integrated the country’s CBDC bringing it to its billion plus user base.

Notably lagging is the U.S. When you’re the world’s reserve currency, there’s that much more at stake.

But last week, the Federal Reserve finally published (after much delay) its paper weighing the upside and potential challenges of introducing a digital dollar backed by the central bank.

On the positives, from the NYTimes report:

Such a currency “could provide a safe, digital payment option for households and businesses as the payments system continues to evolve, and may result in faster payment options between countries,” the Fed release accompanying the discussion paper stated.

Cross-border payments are particularly slow and expensive, relying on the correspondent banking system.

On to the challenges, from the same report:

But the paper also noted that a central bank digital currency would raise policy questions, including about its effect on the financial sector, the cost and availability of credit, the safety and stability of the financial system and the efficacy of monetary policy.
…
Commercial banks, for their part, have been worried that the creation of a central bank digital currency and Fed accounts could take away their deposit base and upend their business model. The paper probably does not address all their concerns, but may serve to calm worries that consumers could fully leapfrog the traditional banking system.

It’s a particular challenge for an institution that has historically preferred a hands off and decentralized approach — outside of extraordinary circumstances. The average person often considers money creation the responsibility of the Fed, but that job is actually outsourced to banks through fractional reserve lending. By loaning out money they don’t have, banks create more money. (How the Fed sets interest rates impacts all of this, but you get my point.)

For the Fed, decentralization of money creation makes a lot of sense. Banks are better positioned to manage the risks of their customers and communities.

The same has been true of the digital dollar. Today, most of my dollars exist in digital form, managed by my bank’s centralized ledger.

Introducing its own CBDC flips that historical framework on its head with the Federal Reserve stepping in to take a far more outsized role in how money works today. Doing so without rocking the boat too much will be a top priority.

It’s also why the Fed was crystal clear in its paper that it had no plans to offer consumer accounts at the central bank, which would further step on banks’ toes. The NYTimes again:

The Fed paper also seemed to slam the door on several possibilities — including the idea that a central bank digital currency could be created alongside consumer bank accounts at the Fed, something Democrats and proponents of broader financial inclusion have at times suggested.

But as the Fed itself argues, the rise of crypto is already disrupting the system whether or not central banks decide to participate. Change is inevitable and it will be up to banks whether or not they sink or swim given the choices now available to consumers.

In that sense, crypto has always been a forcing function for innovation within a historically slow moving industry — just as platforms like PayPal, Venmo, and Square likely sped up the adoption of solutions like Zelle, which allowed customers to easily send money to each other (even across different bank ledgers).

Here’s the Fed:

“A C.B.D.C. could spur innovation by banks and other actors and would be a safer deposit substitute than many other products, including stablecoins and other types of nonbank money,” the paper said. “These forms of nonbank money could cause a shift in deposits away from banks even without a C.B.D.C.”

And just like that, the Federal Reserve has officially started the conversation.

Relevant:

2. The web3 wars continue

Speaking of ongoing conversations, the promises of web3 continue to command vigorous debate.

Let’s start with a disclaimer: When it comes to human problems, technology is never the solution; it’s always just a tool.

And as a tool, it’s always a double-edged sword.

The arrival of Spotify meant that anyone could call themselves a published musician. The reality is that a handful of global stars (along with Spotify) rake in the majority of revenues.

(Notably, this is also the case for tennis and golf players. The point being — this isn’t a technology problem.)

Zooming out, you can see how this applies to the greater internet. The Worldwide Web promised to democratize information — and it did. Today’s web2 version of that same internet grapples with complex social and economic issues around misinformation/fake news, deplatforming, and Big Tech monopolies.

Early in the hype cycle, new technological frameworks promise to solve human problems. But reality is a bit more complicated.

Now that web3’s 2021 honeymoon period is over, a vibrant conversation is emerging around those very complications — ignited by that juicy tweet from Jack.

That conversation is only just beginning, but this week, we have a post from NYU professor Scott Galloway’s No Mercy No Malice newsletter (via /gregkidd).

And Scott pulls no punches:

Preaching liberation while sequestering into gated communities is endemic to tech. The “personal” computer was going to free us from the grip of IBM’s dominance in mainframes, but it fell under the even greater control of Microsoft. Apple claimed to be a revolutionary fighting Big Brother, but it erected the greatest tollbooth for creativity in history (the App Store). “Information wants to be free” was the rallying cry of earlier web company managements trying to convince fawning, idiotic content companies to exchange their content for pennies on the dollar.
…
Web3 has different-colored hair, but the same DNA as earlier web paradigms, which decentralized services at an unprecedented scale to centralize wealth and influence at an unprecedented scale. Ninety-three percent of intentions and two thirds of decisions are influenced by two firms. Is that a good thing? Pro tip: Ask someone with teen girls. So far, web3 is web2.01.

So is web3 the solution? No.

Is it a powerful tool?

Certainly.

Much like the conversation around a Federal Reserve backed CBDC, it’s a question of centralization versus decentralization and there’s still plenty to be hashed out.

3. Tweet of the week — IG NFT edition

And speaking of legacy platforms adopting next generation innovations, here’s Blockworks (via /anej):

Relevant:

GiD Report#196 — How crypto is changing central banks

1. Better late than never

2. The web3 wars continue

3. Tweet of the week — IG NFT edition

4. Stuff happens

Written by GlobaliD