Are digital currencies the future of money? And if they are, will central bank digital currencies (CBDCs) or stablecoins lead the way?
Alisa DiCaprio, chief economist of R3, a leading provider of digital currency integration and interoperability software solutions, joined Converge to answer these questions and explore the future of central bank digital currencies (CBDCs), stablecoins and digital money.
Read on to find out what lies ahead as governments, merchants and consumers increasingly adopt digital currencies to transform global commerce.
Solving the puzzle of consumer sentiment in digital currencies
One of the biggest unknowns regarding the future of digital currencies is privacy: Will consumers be open to handing over the private data that government-run digital currencies need?
“When you have a digital currency, you can collect all kinds of data,” says DiCaprio. Like most programs or products, when CBDCs collect more data, they’re able to operate more efficiently. For digital currency operators, DiCaprio stresses that “you want this data; it can make your monetary policy easier to execute. But if you’re a consumer, you probably don’t want your government to have that data.”
As digital currencies become more common globally, different governments have adopted different approaches to consumer data collection. Some (like China) aggressively collect data without opt-out options, while others (like the European Union) don’t collect any data. For most governments, the main question looking forward is: What’s a good balance?
Only time and increased adoption will tell. “We don’t have enough circulating CBDCs to know how consumers will react to it [right now],” DiCaprio says.
Global usage: evolving to serve different needs
One thing we do know is that stablecoins and CBDCs have similar use cases; they can do many of the same things. And the concept of private-sector payment systems is not new.
“If you look at the history of money, the private sector has historically issued private money,” she says. “You see this all the time if you go to a concert and they give you tokens that you can use to pay instead of money because they don’t want you using money. This is something we’ve had for decades.”
Where we’re seeing a divergence is in geographical usage patterns. So far, developing economies have been early, aggressive adopters of CBDCs. The Middle East, for example, is leading the way with CBDCs, while the US, UK and EU have been more cautious with their strategies and slower to integrate.
It’s all playing out as an organic process of the global diversification of payment systems. As DiCaprio says, naturally, “you’re going to have different populations using it for different things.”
The new geopolitical realities for central bank digital currencies
The growth of CBDCs is notable, says DiCaprio, because of the unexpected geopolitical integration they’ve generated.
“If you look at the wholesale CBDC space, we’re seeing a different alignment of countries than we’ve seen before. You would normally expect regional integration with natural trading partners or countries that you typically interact with a lot,” she says.
“CBDCs are leading to these new types of interactions and a completely new geopolitics of techno-nationalism and how we’re using digitalization for the political process.”
While consumers, banks and governments shouldn’t expect a complete revolution in the payments space, “I don’t see the US dollar being replaced as a reserve currency or anything like that,” she says.
But genuine and growing diversification could come soon — and governments are catching on.
“Four years ago, regulators had no idea what was going on,” she says. “Now they know just as much as everyone else, and they’re doing an absolutely excellent job understanding how to protect consumers, how to protect the economy, and still let innovation thrive.”
The power and pitfalls of AI
Groundbreaking AI technologies are boosting the ability of digital currency providers and CBDCs to gather even more data at faster rates.
“AI is about data analysis. CBDCs are about data collection,” DiCaprio says.
One advantage of CBDCs over stablecoins? Central banks have the power to implement rules that govern privacy issues.
“With a central bank digital currency, you could program it such that there was a crisis, and then it automatically executed whatever the rule was in that crisis,” she says. “AI could help us move closer to that because you could use the AI to analyze your options and then converge a committee to have them enact [the response].”
So which comes out ahead: CBDCs or stablecoins?
Even with the in-built advantages of CBDCs, it’s still unknown whether stablecoins or CBDCs will emerge as the dominant force in the market. Or if either will ever emerge as a complete market leader.
“They certainly have overlapping use cases,” DiCaprio says. “There’s no problem with that. We’re diversifying the payment space, which is something that we’re all trying to do. It makes it a more vibrant space.”
The main obstacle for both stablecoins and CBDCs remains widespread public adoption.
“Stablecoins can do most of the stuff that cash can,” says DiCaprio.
But while stablecoins can replicate the function of cash, certain populations, like older adults, immigrants or tourists, still depend on cash. Plus, “most [merchants] won’t accept it,” she says. “It becomes a question not just of usability, but also of acceptability and merchant uptake.”
Why CBDCs and stablecoins could be here to stay
So what does the future hold for stablecoins and CBDCs? Most experts expect to see increased adoption in the short term — but slowly.
“There’s some reluctance from the merchants because they need to know that consumers want to use it,” notes DiCaprio. “And there’s some reluctance from the consumers because they want to make sure merchants take it, and they’re still unclear about the privacy and security aspects.”
Still, despite slow adoption, consumers should know that government-issued digital currencies are here to stay. After all, according to the Atlantic Council, 134 countries are already exploring CBDCs, while three countries have fully launched them.
“We need a way to keep a payment system that the government can maintain because if the private sector doesn’t see it as viable anymore or profitable, they’ll close it down,” says DiCaprio. “It is a public good, and you need the government to build that.”
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*The information shared on this blog is for informational purposes only and should not be considered financial advice. Please note that the opinions expressed on Converge are solely the opinions of the host and the guests, not Convera’s.
