The week CBDCs went nuclear: cross border transfers, privacy by design, sanctions, China de-dollarization and rebutting the case against CBDCs
Universal banking is dead, killed by digital!
1. Rebutting the Case against CBDCs
2. mBridge helps CBDCs go nuclear on sanctions
3. China will de-dollarize using CBDC and Hong Kong
4. Hong Kong’s CBDC: privacy by design
5. Universal banking is dead, killed by digital
"OP Redwing, shot Mohawk" atomic bomb test blast over Enewetak Atoll, 1956.
1. Rebutting “The Case against CBDCs”
Enjoy the boxing match as I rebut one of the more thoughtful anti-CBDC articles!
Download the article: here
Another article is available that makes the case for CBDCs but does not address directly the “case against.” Here
This article is one of the more refined anti-CBDC reads I've seen in a while. I ignore most, especially those with clickbait claims that CBDCs will be the "end of freedom."
Dante A. Disparte is the strategy officer for stablecoin Circle, he's a great guy, and I like a lot of his writing! Still, CBDCs are stablecoins' greatest nemesis, so I understand why he dislikes them! Note that Dante did reach out and called the points I make “thoughtful reflections.” So please do not misconstrue thoughtful rebuttal for a social media flaming campaign!
I like stablecoins and CBDC and think they will coexist peacefully just like Visa and American Express. Consumer choice is always good.
Let's dive in: (the comments in bold are extracted directly from the article)
🔹 Circle is available in 191 countries.
Can USDC claim it is AML/KYC compliant in all 191 countries? Is Circle certain that USDC is not undermining developing nations' monetary sovereignty to their detriment?
🔹 CBDC designs, including China's, impose balance limits on digital wallets:
China has limits for personal use and unlimited corporate use. Cash limits are both practical and enhance safety which is why credit cards use them! If there were limits on USDC movement, perhaps it wouldn't be so frequently stolen from hacked exchanges!!
🔹 Pressure on bank deposits and disruption?
The US Fed, Bank of Canada, and ECB research have all made it clear that CBDCs do not disrupt the banking system. Nevertheless, detractors, mostly banks, still say that CBDCs will "break the banks." They won't.
The author ignores the massive funds pulled out of banking to collateralize stablecoins. These amounts will likely be greater than with CBDCs!
🔹 A central bank has to make a hundred-year technology bet.
What?! CBDCs are not expected to remain with a fixed design that will last 100 years! Is USDC built on a 100-year tech stack?
🔹 Extreme temptations of de-platforming people from money or micro-level surveillance.
As evidenced by the Fed's project Hamilton paper, the digital euro, and the Hong Kong dollar, CBDCs can be designed where the gov't doesn't have access to your data. So how can gov't surveil you? Ignoring good CBDC design because it doesn't fit the narrative is a stretch.
Deplatforming already happens now without CBDC! Look at Canada's trucker strike bank closures or IRS tax liens.
🔹 A CBDC would be tantamount to the Federal Aviation Administration flying planes and building jet engines.
The Fed already built and operates the FedWire bank-to-bank wholesale RTGS system and is now building the retail FedNow RTGS system. So the Fed already builds and flies payment systems! How can Circle not know this?
Takeaways:
I like stablecoins and USDC is the best of them all so far. Stablecoins and likely USDC will have an important role in our future.
Both stablecoins and CBDC will peacefully coexist
Stablecoins will keep CBDC honest! Having stablecoins as an option will give consumers choice and ensure CBDCs cannot become instruments of government control.
Always remember that USDC's biggest threat isn't another stablecoin competitor but the digital dollar!
Circle knows this and should be concerned.
2. mBridge helps CBDCs go nuclear on sanctions
(part 1)
💥☢️BOOM!☢️💥 mBridge transferring $22m in CBDCs cross-border is a nuclear bomb going off in the payment world and most of the world slept through it! Sanctions will never be the same.
Download the mCBDC report: here Sanctions are imposed in this system at the commercial bank circle then the central bank circle in the diagram. The innermost transfer network between central banks does not impose sanctions. Sanctions are imposed prior to entering the network. A massive change.
I am not exaggerating when I say this report is nothing short of a nuclear blast! I am not going to focus on the technical issues of the mBridge system but instead, look at the topic of our time, sanctions. Once mBridge launches sanctions will forever change.
Let's break this into four sections:
1️⃣ mBridge what is it?
mBridge is the largest cross-border CBDC pilot to date, with over US$ 12 M of CBDCs issued onto the platform, over US$ 22 M of payments, and FX PvP instantly settled across borders.
Over 20 of the region’s largest commercial banks participated in settling REAL VALUE on behalf of corporate clients. The settlements were for international trade and interbank transfers. The countries represented, China, Hong Kong, UAE, and Thailand which represent 19% of global merchandise trade!
2️⃣ Sanctions:
MBridge's biggest impact will be on sanctions, as it sets up a decentralized blockchain (DLT) system that is sponsored by the supporting central banks and is not responsible for sanctions enforcement.
Each of the central banks supports a node on the platform and the platform simply transfers CBDCs between accounts. Sanctions are enforced by the individual commercial banks that use the system before they are put on the mBridge network. The users enforce sanctions, not the network!
Compare this with SWIFT which enforces sanctions on all network participants. Sanctions are built-in to the network, unlike mBridge. This is a revolution in payment transfers as the network is politically neutral.
3️⃣ Sanction vulnerability:
Now the next question astute readers will ask, is whether mBridge itself can be sanctioned by the US or EU?
Here is where mBridge takes a page right out of crypto. The decentralized nature makes the entity itself pretty much sanction-proof. What would you sanction? The bridge is decentralized and run by participating central banks, while it may have a small office, there is no massive presence to sanction.
4️⃣ Hong Kong vs Singapore
Singapore also has a CBDC transfer system built by the BIS that is a technical work of art. The problem is that I think it's a more vulnerable domicile. Let me be blunt, which of the two “city-states” would likely buckle to US demands for sanction enforcement? HK wins hands down due to its association with China.
I know that is controversial but likely true and why HK will be the world’s leading CBDC transfer center.
MBridge is a game changer and is scheduled to go into MVP and then production. I expect the MVP to be running in 2023.
Takeaways:
MBridge is the most important piece of CBDC architecture being built today
It shows us exactly how CBDCs will be used in cross-border transfers to reduce cost and increase speed and efficiency.
MBridge is going into production look for it to go live end of 2023.
Cross-border CBDC transfers are not 20 years away but 1-2, showing that the future is coming faster than you think
Do you think the Fed still thinks there is no first-mover advantage in CBDCs?
A nuke just went off. I felt it. Did you?
3. China will de-dollarize using CBDC and Hong Kong
(part 2)
💥☢️BOOM! ☢️💥 Hong Kong’s mBridge is the centerpiece of China’s de-dollarization plans!
Read “China Is Quietly Trying to Dethrone the Dollar” by Zongyuan Zoe Liu: here Note that this image is brought to you by DALL-E AI! Amazing!
PAYWALL: use private browser mode or input the URL into printfriendly.com
China's de-dollarization is upon us and this article in Foreign Policy magazine by my LinkedIn friend Zongyuan Zoe Liu, is one of the best I’ve seen on the topic!
Part 1 of this 2-part series (above) covered Hong Kong’s mBridge CBDC transfer system, which will be a centerpiece of China’s long-term de-dollarization plans. If you missed it and came here directly please read Part 1 first!
Zongyuan’s article is perfect and highlights how China is meticulously reducing its dependence on the dollar. Note that I said reduce, not eliminate.
🔹 De-dollarization is not the elimination of dollar use:
From Zongyuan’s article: “Beijing is not, for now, attempting to make the yuan an internationalized currency. It does not seek to dethrone the U.S. dollar and replace the dollar’s dominance in the global system with the yuan. Instead, it is taking steps to make the yuan a regionally powerful currency through local institutions in China and regional intergovernmental organizations such as the SCO.”
For those who say "China can’t eliminate dollar use.” I agree! China won't eliminate the dollar but will reduce usage in trade groups like the SCO, BRICS, and RCEP.
To break dollar hegemony, China doesn’t have to eliminate the USD. Just provide an alternative!
Look at fintech as a model. Fintech doesn't eliminate incumbents but forces them to alter their behavior radically by providing an alternative. Same with the e-CNY!
🔹 The triggers for e-CNY adoption:
The first trigger is the chip ban, which I wrote about last week. (here on substack) It is designed to kneecap China’s digital programs and is costly not just to the US but to Japan, Korea, and Taiwan. New bans are already in planning that will cause debilitating losses to allies whose economies are inextricably tied to China’s.
The second trigger is the soaring US dollar which devalues Asia's currencies and drives up trading costs to prohibitive levels. Asia will rush to use mBridge because it allows them to transact in local currency and avoid expensive dollars.
🔹 The infrastructure:
With mBridge and the existing CIPS network, we have purpose-built infrastructure designed to be sanction-resistant and RMB friendly. Both are important, but MBridge is superior because it is politically neutral. It doesn't belong to China, nor is it controlled by China. Its neutrality makes it the perfect venue for regional trade to revalue trade to RMB.
Takeaways:
This is what de-dollarization looks like. It is slow and deliberate, and most won't see it coming.
Expect the first use of mBridge in 1-2 years with broader Asian adoption in 5.
Watch as pundits say continue to say that de-dollarization, "will never happen."
4. Hong Kong’s CBDC: privacy by design
Hong Kong’s GROUNDBREAKING new CBDC design PROVES that fearmongering about "Orwellian CBDCs" is total BS!
Read how Hong Kong’s new CBDC has “privacy by design” built in: here
This is a breakthrough in CBDC design!
Strong enough words for you? The news is full of “experts” proclaiming that CBDCs are Orwellian or “the end of freedom.” The Hong Kong Monetary Authority (HKMA) and BIS Innovation Hub prove once again that good CBDC design delivers better privacy than what you've got now!
🔹 GROUNDBREAKING Design
The key to HKMA’s CBDC is that it is an “intermediated” design (see pg 5) as opposed to the more common "hybrid" two-tier CBDC, as used in China.
Hybrid means that a commercial bank (bank) faces customers and provides them with retail CBDC (rCBDC). RCBDC flows directly from the central bank (cbank) to the bank with CBDC transactions recorded on central bank systems.
In HKMA’s intermediated design banks handle clients but issue a CBDC that is separate and distinct from the one it gets from the central bank.
THE CRITICAL PART is that the rCBDC is issued by your bank and bank networks do all CBDC processing. The cbank does not have rCBDC flow data!
The cbank issues a wholesale or wCBDC to the bank and the wCBDC stops there! The rCBDC and wCBDC are not connected!
Note also that the rCBDC is a token, it is not account-based. This adds additional privacy to user transactions because tokens contain only a wallet identifier and no other personal data.
🔹 Privacy by design!
With this intermediated CBDC the HKMA can say: “We don’t know what you’re spending with your rCBDC because we do not have -ANY- of that data!” The intermediated design breaks the link between government and your rCBDC.
So please don’t tell me that the gov’t is spying on you. If you believe this, please tell me, how? This is LIKELY similar to the design of the digital euro.
The tokens used also preserve privacy. The only entity that can connect a user's digital wallet with their name is their bank which contains KYC data. This is far more private than the credit cards you use now!
🔹 A CBDC STABLECOIN!
In a world first, the HKMA will also allow banks to issue a CBDC stablecoin which is not cbank backed but a liability of the issuing bank. What new features banks will be built into these stablecoins is the question? Programmability? International transfers?
🔹 UTXO, say thanks to Bitcoin!
Once again I say that we all owe a debt to crypto, and I mean it! The wallets will use UTXO protocol just like Bitcoin which will likely make them compatible with offline use!
🔹 Design tradeoffs
All CBDC designs come with a series of tradeoffs. So what are the trade-offs in this design? The biggest gain is that the HKMA will not need to run a complex retail tech infrastructure. In trade, it will need to run more complex supervisory systems to monitor banks’ rCBDC issuance.
The other tradeoff is that the Hong Kong government will not have access to even deanonymized CBDC data unless it is able to acquire this from the banks as it does now with credit card data. This data can be used by the government to better understand macroeconomic policy issues and is a valuable feature of CBDCs. Still, this is certainly a reasonable trade-off given the gains in user satisfaction with privacy!
Takeaways
The Hong Kong CBDC model is a true breakthrough and delivers “privacy by design”
Anti-CBDC advocates will likely not be convinced despite this “spy-proof” architecture.
Kudos to HKMA and BIS Innov Hub for a huge CBDC breakthrough!
Is this the new global CBDC standard?
Yes, I think it is!
5. Universal banking is dead, killed by digital
Universal banking is DEAD, and digital is the only for banks to survive!
McKinsey’s report Reshaping retail banks: Here
McKinsey delivers a sobering but accurate message to retail bankers that the universal banking world has been killed by digital. Of course, bankers have heard this before, but many are still procrastinating.
Universal banking was fun while it lasted! Your bank would provide a full suite of services, deposits, loans, insurance, and investments. A one-stop shopping experience that would make you love them and put them at the center of your financial life.
The problem is that universal banking doesn't work in a digital world with neobanks, roboadvisors, and platforms backed by big techs like WeChat or Apple!
Disaggregate your bank
McKinsey's solution is to disaggregate universal banks to see exactly which products are profitable. As it is now many banks honestly don't know.
The goal is to "target profit pools in specific businesses where they can define and deliver a value proposition that can win in our new digital age." It's a tall order but banks that don't do this will not survive.
Global differences
Banks differ across the globe, and McKinsey recognizes three distinctive markets with different digital strategies for each:
1️⃣ Europe, North America, and developed Asia:
Embrace new technology to lower cost curve; fight attackers on innovation; identify new sources of revenue in end-to-end journeys
2️⃣ China and emerging Asia:
Fight for share of wallet while also focusing on increasing the penetration of higher-value businesses, especially complex lending.
3️⃣ Latin America and MENA.
Leverage current profits from daily banking to defend market share against digital attackers and avoid the economic challenges to daily banking as seen in North America.
Banks can’t win
But there is a huge problem, banks are being forced into a tech war they are ill-equipped to win. Even the largest banks can't compete with big tech or neobanks on the digital playing field.
But wait, it gets worse! Banks' lifeblood deposits are now decoupled from their branch networks! This means that bank’s traditional strategy of opening a new branch will not help gain deposits. They are leaking deposits to digital players and there is little they can do. The questions are how fast is the leak, and where will the money for digital programs come from?
McKinsey's solution is that banks must build platforms! Surprised? I'm not!
The suggested platform must target users' three primary uses: daily life, home and life events, and "Wealth and protection." Each with a granular product-by-product strategy to counter digital competitors. While Mckinsey makes this sound easy, this is brutally hard for most banks. I predict that more will fail than succeed, regardless of how much they pay McKinsey!
Takeaways
I think McKinsey’s analysis is correct, universal banking is dead and cannot be resurrected.
If banks' only solution is to build platforms, many aren't going to make it.
Building platforms represent not just a technical challenge but a huge cultural leap; even paying McKinsey will not guarantee results!
Banks are backed into a corner and must improve their digital game. If they don't, new digital players will pick off their products, hollow out their profits, and cherry-pick their clients.
These are brutal times for banks!
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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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