Central bank digital currencies were once looked upon as nothing short of the future of money around the world.
Yet at least in the US, that sunny outlook for central bank digital currencies (CBDCs) is in serious doubt for one simple reason: Donald Trump and his Republican allies hate them.
Along with Trump’s newfound support for cryptocurrencies comes a disdain for the idea of creating a digital dollar, a sentiment prominent among executives in the industry who rage against CBDCs as dangerous surveillance tools of the state, because their usage can be tracked by authorities.
Of course, digital forms of fiat currencies also present major competition for the industry since they undermine major use cases for crypto by allowing for the elimination of financial intermediaries and faster, simpler transmission of money.
Yet Trump’s vow to never allow the dollar to be digitised carries significance far beyond the crypto world: It may turn money into a new front in the former president’s trade war with China, which has emerged as a leader in the nascent world of CBDCs.
“Many believe that we may end up in a new ‘CBDCs Cold War-era’ where you’re going to have a big chunk of the world, probably the US and potentially Europe, where CBDCs will not be a thing and they’ll probably be banned,” said Henri Arslanian, an adjunct professor who teaches courses on crypto and financial technology at the University of Hong Kong.
“When you look at the research and the data, you can really see that these two ecosystems are moving in very different directions – countries like China today are easily five, six years ahead of the rest of the world when it comes to CBDCs.”
Though the growth of CBDCs globally has been slow due to complications involved in introducing them into the financial system, the thinking behind them is quite simple. While the ubiquitousness of online banking and brokerages in the 21st Century makes it seem like the dollar already is “digital”, the balances displayed on your screen actually only represent liabilities of the companies holding the deposits. A CBDC, on the other hand is more like the paper currency in your wallet – just in the form of a digital token that can be sent directly to whomever you want.
Many countries have ramped up research into central bank currencies in recent years and several have introduced them – at least in baby steps – to their economies. In the US, the official research has been spearheaded by Project Hamilton, a collaboration between the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative. The project released a paper in 2022 examining the risks and benefits of a digital dollar, but the Fed has made no official decisions on whether to pursue a CBDC.
Federal Reserve Chair Jerome Powell has said that the central bank couldn’t introduce one without the approval of Congress. Chances of that happening have started to look slimmer and slimmer as the presidential campaign got into full swing. In late May, the House of Representatives passed a Republican-led bill to block a CBDC amid a sharp partisan divide.
While Republicans, including Representative Tom Emmer of Minnesota, were concerned about the invasion of privacy that CBDCs may bring, some Democrats like California Representative Maxine Waters argued that the bill would hinder innovation and eventually leave the US as the only country to ban the new form of money.
Trump’s vocal opposition to CBDCs may prove to be the final nail in the coffin should he return to office next year.
“Republicans will end Democrats’ unlawful and unAmerican Crypto crackdown and oppose the creation of a Central Bank Digital Currency,” the Republican platform on the website of Trump’s campaign reads.
“We will defend the right to mine Bitcoin, and ensure every American has the right to self-custody of their digital assets, and transact free from government surveillance and control.”
However, some experts push back on the privacy concerns, pointing out that the government can still surveil transactions made through commercial banks.
“When you’re paying with your credit card, the bank will know what you do with it,” said Vincent Gusdorf, an associate managing director of digital finance and AI analytics at Moody’s in Paris. “And as a matter of fact, some banks are selling credit card data anonymised.”
Also, the ability to surveil the flow of money more easily has a plus side: It makes it simpler to combat money laundering and tax evasion, for example. Yet the main potential benefits of CBDCs arguably are more bottom-line oriented, which may make them attractive to the private sector. In wholesale applications, they can facilitate cross-border transactions between trading partners. And in retail uses, they could make remittance payments cheaper, faster and simpler.
“International payments are actually a bit clunky, very often expensive, and slow,” said Gusdorf. “There’s a lot of improvement opportunities there for CBDC.”
Yet the only way CBDCs will facilitate improvements in cross-border payments is if many countries get on board with the concept, most notably the issuer of the US dollar – the most-important currency in the world. And unlike in emerging markets, the retail use case is less appealing in the US, which makes CBDCs a tougher sell to the general public.
“A big percentage of people in the US only send money and interact on a day-to-day basis with people in the US,” said Arslanian, the Hong Kong professor. “Now, when it comes to the percentage of people who are doing cross-border payments or sending remittances, they have a range of options from stablecoins to other digital assets. And a CBDC may not necessarily solve those issues that they’re facing right now.”
Meanwhile, even in China, there are signs that privacy concerns and well-established private-sector payment systems are proving to be a headwind to widespread retail use of the digital yuan, known as e-CNY. While the government is paying some state employees with e-CNY, most are converting it to cash immediately, according to the South China Morning Post. Active transaction often only happens when a city doles out consumption coupons that requires spending to be made in the digital currency.
The cumulative transaction value in the digital yuan reached 6.6 trillion yuan by the end of May, according to the People’s Bank of China. That’s just a fraction compared to the overall transaction value via mobile payment of 555 trillion yuan in 2023 alone, based on PBOC data.
Still, China is pushing forward with efforts to foster the adoption of its CBDC in international trade. The first real-trade service of a multi-central bank digital currency occurred on July 15, when a trading enterprise in Foshan city sent money to a Hong Kong client in exchange for goods, state media reported.
Ultimately, the experience – and the effect on the bottom line – for users like that may determine whether China gains ground in the “CBDC cold war” against the US dollar, the world’s leading reserve currency and the lifeblood of the global financial system.
“There is an argument that by not launching a CBDC, the US may fall behind in terms of broader international competition with regard to currency usage,” said Gusdorf of Moody’s. “The US dollar today is by far the No 1 reserve currency and it provides a number of advantages to the US, but you have all these currencies that are gaining traction,” he said.
BLOOMBERG