DIGITAL EURO SPECIAL, three great reads showing how it's becoming a reality! Plus, Crypto whales leave the little guy holding the losses; China is bullish on blockchain.
Is the digital yuan a role model for the digital euro?
DIGITAL EURO SPECIAL
1. Digital euro as a “public good.”
2. Digital euro goes to war.
3. China’s digital yuan a “role model” for the digital euro!
4. Crypto’s whales dumped at the expense of the little guy.
5. China is bullish on blockchain.
Sorry no artwork tonight…just a special edition banner as this was a big week for digital euro stories. People are waking up that its real and its coming!
1. Digital euro as a “public good”
The ECB views the digital euro as “a public good” and will focus on P2P and e-commerce payments at launch!
Download three of the six PPTs from the ECB on this link: here I confess three were a bit too dry for inclusion!
The ECB Market Advisory Group just published six PPTs from their recent meetings which revealed a bit more on how the ECB thinks of the digital euro and how they’ll roll it out. Once again, the ECB’s openness and clarity are a model for other nations.
Let’s dive in to the three PPTs:
1️⃣ Compensation:
Here the ECB makes it clear that the digital euro is a “public good”, just as cash is today, and that it is the evolution of cash into the digital realm. Gov’t provides cash as a public good. Why wouldn’t it provide digital cash as society goes digital?
Private individuals will have free use of the digital euro, just as they do with cash today. (see chart above)
Payment service providers (banks, potentially mobile companies) can change merchants to offer digital euro services, as they do with card services today.
The ECB is coy in saying that the cost for merchant services will be set by the “market” in an open “competitive space” with “greater choice.” The participation of mobile operators and non-banks -should- ensure that these rates are much lower than cards.
The ECB is interesting as it seems to envision economic incentives for distributing the digital euro, which is new ground as this process is usually considered free.
2️⃣ Rollout:
The ECB makes a practical decision for what it calls a “staggered approach” to roll out. (above in green)
The ECB's objective is to reduce “implementation complexities." Make sure it works and give people time to adapt.
The ECB will focus on P2P and e-commerce use cases first!
Point of sale systems and Government payments (G2X) will come later.
The BoE received feedback that PoS systems, whether NFC or QR code, would take time to upgrade.
3️⃣ Client journeys:
The BoE has identified some 40-50 client journeys or different ways that users and merchants will interact on the system.
I have included this PPT to show the QR code payment client journey on page 11.
Note carefully on slide 11. When you pay with QR code you leave NO data with the e-commerce portal. Think of this. In China, we NEVER leave payment data on servers, while in the West we “trust” internet companies with our most precious data! How nuts is that?
Takeaways:
The ECB rightly views the digital euro as a “Public Good”
The system will be paid for with merchant fees, just like cards and Alipay!
I am surprised that the ECB envisions fees for distribution….watch carefully!
E-Commerce and P2P payments will be the first launched!
2. Digital euro goes to war
The Digital Euro and CBDC go to war as part of the great geopolitical game.
I wrote in my book “Cashless” that “China’s CBDC is a pawn in a much larger geopolitical game.” Sadly, that game also includes defense.
Download: here
The “European Army Interoperability Centre” looks at how the digital euro could impact the defense sector.” If that isn’t a chilling thought, what is?
Still, I read this article with a certain sense of inevitability, I knew it was coming!
The author Tomas Farinha Carney does a great job focusing on CBDCs' ability to exert new controls over payment. His conclusion...
Weaponized CBDCs are coming, and I sadly agree. We need only look at how sanctions are used today to understand how CBDCs will play a significant role in future conflicts.
The author sees three possibilities and draws a stunning conclusion:
1️⃣ The effects of future sanctions will likely be more impactful and severe than currently. (Unlikely)
“Central banks could apply specific sanctions on targeted individuals and companies,....on a broader scale, central banks could potentially freeze their currencies within sanctioned nations which could both prevent the utilisation..., but also limit the exchange of their currency with sanctioned currency.” (Russia now, no CBDC needed.)
2️⃣ Digital currencies could also weaken the contemporary sanction regime. (Guaranteed!)
“With a digital euro likely to be created before a digital dollar, the potential exists that by being the first digital hard currency, the digital euro could undermine the dominance of the dollar and the US sanction regime."
"While this effect would arguably be small, it would undoubtedly be compounded by the creation of other digital currencies which could allow sanctioned and illegal bodies to circumvent already existing limitations.”
3️⃣ CBDCs a double-edged sword for sanctions.
"Whereas digital currencies would allow for better monitoring and tracing of the finances of rogue states, ...these benefits would quickly be outweighed by the employment of other less stringent CBDCs.”
4️⃣ Conclusion:
“As more states adopt CBDCs, the dominance of the dollar would likely decrease and allow for sanctioned groups to access funding through other digital currencies easily. Especially as disagreements already exist between the United States and some EU member states on what groups should be classified as terrorist groups and what level of sanctions they should receive”
Takeaways:
CBDCs are part of the great geopolitical game, not just for buying coffee.
The digital euro may exacerbate EU and US tensions over sanctions.
Assuming that the EU and US will march in lockstep is an error.
CBDCs will make sanctions enforcement far more complex if not impossible.
Watch carefully as BRICS launch CBDCs this year.
3. China’s digital yuan a “role model” for the digital euro!
China’s digital yuan is a “role model” and is forcing the ECB’s hand in creating the digital euro as is the US Fed’s “missed opportunity”.
Full report: here
Tonight's report on the digital yuan is a great read that shows how important the digital euro is for our future and how the digital yuan forced the EU’s hand.
Forgive me if I write less than normal in this article because the text is just so good:
🔹 The e-CNY and China’s independence:
One way of challenging the leading position of the US dollar would be to introduce a sovereign digital currency as a technologically superior form of currency. ...The opportunity to play a leading role in shaping the new field of CBDCs, establishing favorable structures, and setting new standards to align with Beijing’s general geopolitical approach to increasing its degree of independence from the West.
🔹 The US’s missed opportunity:
“The US, as the main competitor of the PRC, does not support a self-developed digital currency to back up the position of the USD. Following the leading position of the dominant USD, which featured in 88% of all foreign exchange transactions in 2019, a high level of influence could be achieved, but this opportunity for a digital currency organized by the FED was missed.”
🔹 CBDC coexistence with crypto:
Regarding potential synergies between CBDCs and existing digital assets, we regard the composability and interoperability of the digital euro with widely established cryptocurrencies, such as Bitcoin and Ethereum, as a critical driver for the successful coexistence of two thus far isolated domains.
🔹 Yes to DeFi:
[An ECB] inclusive approach of transparent integration, regulation, and certification would be a significant alternative to the prohibitive governance in China and the reluctant governance in the US
Takeaways
Today’s takeaways are the author’s recommendations to the ECB, as they are PERFECT!
The emergence of decentralized cryptocurrencies revolutionizes traditional finance and requires central banks to respond.
CBDCs provide significant technical potential to improve monetary policy instruments and financial governance.
The development of other CBDCs, particularly in China, forces the ECB to develop a European CBDC in response so that it can shape standards.
The technological opportunities to track and analyze payment flows in real-time provide a new chance to enhance monetary policy and learn directly from its outcomes.
The ECB should pursue a participatory and integrative approach towards the emergence of digital assets to establish a digital euro as a competitive component of the global digital economy.
4. Crypto’s whales dumped at the expense of the “little guy.”
“HODL, THIS IS A BUYING OPPORTUNITY!” said the crypto whales as they dumped and left the "little guy" holding the bag!
Download the BIS report: here
The BIS is no crypto fan, but even accounting for their bias, today’s report is a shocker. It should make crypto lovers and haters feel equally nauseous.
The BIS’s latest revelation is that crypto whales “dumped” their holdings on the little guy as markets burned.
Surprised?
Nah…just another day in crypto.
FTX and Terra crashes were accompanied by whales, crypto influencers, and the cheerleader press (can you call them press?), extolling to the crypto faithful that this was the buying opportunity of a lifetime.
See my two google searches post FTX and Terra collapse (pg 2 and 3) that show the never-ending siren call to “Buy now!”
The BIS analysis found:
“Larger investors probably cashed out at the expense of smaller holders. The data reveal that owners of large wallets, the “whales”, reduced their holdings of bitcoin in the days after the shock episodes."
"Medium-sized holders, and even more so smallholders (“krill”), increased their holdings of bitcoin. The price patterns suggest that larger investors were able to sell their assets to smaller ones before the steep price decline."
The kill shot:
"As discussed in Auer et al (2022), large holders thus profited at the expense of smaller investors.“
And by the way, as I mentioned Terra above, you did read that its founder, Do Kwon stole more than 10,000 bitcoin, didn’t you?
The irony:
There is a poignant irony to the BIS's revelations that they don't cover.
The crypto community regularly touted the participation of institutional investors in crypto as proof that crypto is real and has broken into mainstream finance. This is no doubt true.
Institutional investors, however, are better traders, could care less about “hodling,” and will sell out the little guy in a heartbeat! Never forget Mike Novogratz's Terra tattoo, pumping the coin, when his hedgefund Gallaxy was selling. Gallaxy had no exposure to Terra when the crash hit. Who bought Gallaxy’s Terra? The little guy!
The irony is that while crypto hails the arrival of “institutions,” they make dangerously volatile crypto markets into a killing field for the little guy who honestly believes in crypto.
Deepening the irony is that many crypto believers believed crypto would help them escape domination by whales, funds, and banks!
Takeaways:
Crypto whales preyed on the little guy.
I feel for the little guys, but I am not surprised that their loss was the whales' gain.
I don’t hate crypto, but once again, the data gives ammunition to those who claim it is based on nothing more than the “greater fools theory.”
The irony is crypto libertarians now have the very markets they wanted to escape.
5. China is bullish on blockchain.
China leads the world in being “bullish on blockchain!"
Casper Labs commissioned a survey of 600+ executives in the UK, US, and China about blockchain adoption, and China came out on top. Surprised?
In China 95% say they are “likely, or very likely” to invest in blockchain in 2023 compared to 84% in the UK and 81% in the US. Download: here
Casper Labs' opening line is pithy! “Let's be real. People are tired of hearing about blockchain.” Many are, but not me!
The blockchain revolution that kicked off in 2016 has been long, slow, and hard-fought. That said, blockchain is gaining ground globally, and 2023 will likely have some breakthroughs. Some may be in China.
In China, where the authors note that the “existing knowledge of blockchain is highest,” 95% say they are “likely, or very likely” to invest in blockchain in 2023 compared to 84% in the UK and 81% in the US!
That’s a wide margin, that in part shows how serious China is about blockchain.
A few more stats speak volumes as to why China is a blockchain leader:
Obstacles to blockchain adoption: (pg 20)
This, to me, was the real show-stopper! When surveyed about obstacles preventing blockchain adoption, 46% of Chinese respondents selected “none” compared to 29% in the UK and 17% in the US!
When asked about “cynicism or skepticism in the company” as an obstacle to adoption, the results were even more stunning: China 9%, UK 29%, and US 26%!
With a government mandate to use blockchain, Chinese managers are empowered to try it out and face lower institutional resistance.
State of Blockchain Deployment (pg 19):
Here again, China leads with 70% having deployed a system compared to 57% in the UK and 59% in the US.
So Chinese business leaders are “putting their money where there mouth is” and experimenting with blockchain. It's likely that no one gets fired for trying out blockchain!
Hybrid Blockchain (pg 10):
While all nations favor hybrid blockchains, it is interesting that China has a significant lead in the use of public blockchains, 29%, compared to 20% for the US and UK.
What Casper fails to note is that China has the Blockchain Service Network and other public blockchains which are provided as public services like water or electricity. So yes they use them!
Takeaways:
China is poised to be a world blockchain leader, I see it as part of a broader societal trend of tech adoption.
The gov’t has been vocal in its support of blockchain, which greatly lowers institutional resistance.
Blockchain, like CBDC are not panaceas but should be seen as building blocks for our digital future.
The nations that master these building blocks first will likely have an advantage in our digital future.
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is number 4 on Onalytica's prestigious Top 50 Fintech Influencer list and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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