Cryptocurrencies have morphed from a niche, opaque part of the financial markets – and largely viewed as a high risk, high reward asset for investment – to a systemically important fixture within the global financial ecosystem, with increasing applicability in day-to-day consumer transactions, and a market capitalisation of around $3 trillion.
It is 23 years since the Euro was launched, and it has only been 20 years since you could go to a café in, say Paris, Frankfurt or Luxembourg and pay for an espresso with the same paper banknotes or coins. Two decades later and the European Central Bank – along with other central banks around the world – are now deep in thought about how to digitise their currencies in response to the relentless march of private, decentralised crypto markets.
The task confronting them is urgent. Governments, regulators and central banks, are now racing to provide – and influence from the private crypto market perspective – relevant frameworks and infrastructure for a viable crypto-currency ecosystem. One in which both Central Bank Digital Currencies (CBDCs) and private variants like Bitcoin can exist, protect investors, and be traded freely and easily, but without stifling innovation and growth.
As things stand, regulation around crypto is disjointed and sometimes jurisdictionally conflicting. For example, China has banned it, India is banning some of it, and South America is mostly opening up to it. So where does that leave CBDCs?
In Europe, we have seen the most meaningful advances in terms of regulation through MiCA – the Regulation on Markets in Cyrpto Assets. The purpose of MiCA is to create a regulatory framework for the crypto-assets market, which supports innovation and draws on the potential of crypto assets in a way that preserves financial stability but still, crucially, protects investors and consumers. Next steps are for the EU institutions – Council, Commission and Parliament – to enter into discussions.
While EU alignment is to be encouraged, central banks and regulators also need to be careful what they end up delivering. The Bank of England is a case in point: they are conducting a consultation soon that will inform a decision on whether to move into a “development” phase of a CBDC – Britcoin? – which would span several years. If the Bank of England, or any central bank for that matter, creates a superlative digital currency, while sitting alongside a strict new and independent regulatory environment wrapped around the crypto market, then commercial banks and the private sector more generally will likely struggle to compete and innovate.
What we need are CBDC solutions that are practical, secure and stable, but ultimately vanilla. We also urgently need regulation, but this should be aligned and future-proofed so not to stifle innovation in what is still a new industry or be so restrictive that it stymies a growing market. This will have to be balanced against central banks’ ongoing mandate to issue cash – another duty and systemic pillar of the monetary system.
Ideally, all central banks would work together to achieve the uniformity and order that is required around the rapid development of cryptocurrencies in the global financial ecosystems. What we want to avoid is another Uber scenario, where regulation was late, disjointed, and often ill-fitting – not to mention disruptive to consumers and indeed to Uber’s own growth plans.
So, what comes next? CBDCs will start to permeate the financial ecosystem in much the same way as sustainable finance or net zero goals have. They will become normal and expected. Despite all the political bluster and toxicity of Brexit, it’s clear we have yet another weighty, global, challenging systemic issue to which the UK and EU can and in my view should align themselves. The same applies at the global level so not to squander the opportunity to create robust CBDCs that work effectively for governments and consumers across geographies and markets.
This is a call to action that should benefit us all. Cash is declining. In Sweden, it has diminished substantially. It is a relic of analogue age, and it is cumbersome. So, we must embrace the future of digitalisation and swiftly apply it to currency. But we must work together, both within Europe and across borders, to ensure that we create an international regulatory supervisory framework. This needs to be effective but to borrow a word from Mervyn King, former Bank of England Governor, rather boring too.