Not a day goes by without a story quoting high-level government officials panicking about how China’s introduction of a digital renminbi will obliterate the leading currencies of countries in the West, namely the U.S. and the U.S. dollar.
Then more stories, opinion pieces, and events frame the digital currency space race as pitting the East against the West, repeating the mistake that China’s model is the one that needs imitating because they launched their digital currency “first.” This narrative is wrong for several reasons, and countries that learn the right lessons from this battle – be they in the East or West – can create a future where money is more inclusive and moves quickly, cheaply, and globally.
To start, more than a dozen countries across Asia are studying whether to introduce a Central Bank Digital Currency (CBDC). That includes South Korea, Singapore, Thailand, and many more, according to the Atlantic Council’s Central Bank Digital Currency Tracker. Their research is in varying stages of development and not every country in the East is sold that China’s model is the best.
Where’s the need?
Let’s take Japan, for example. Do they need to introduce a CBDC anytime soon? Cash is widely used and trusted in Japan, and the private sector offers enough digital payment tools and banking services to satisfy the demands of most consumers. About 98% of Japanese citizens have a bank account, according to the World Bank.
Singapore, a country with a long history of financial innovation, is researching a CBDC. But they are not sure whether one is necessary. A recent speech titled “The Future of Money, Finance and the Internet,” by Mr. Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), detailed the country’s thoughtful approach to monetary and financial innovation.
First, Mr. Menon said there are encouraging signs that payment stablecoins like USD Coin (USDC) are being integrated into traditional payment services and that he has seen no evidence that a retail CBDC is urgent. Why? “A high proportion of Singaporeans have bank accounts and electronic payments in Singapore are pervasive, highly efficient, and competitive,” he said.
So MAS is instead partnering closely with the private sector, encouraging continued research, and building regulatory sandboxes so companies can experiment with blockchain technology. And, importantly, they are letting need drive innovation instead of copying China just because China is a large, powerful economy.
Some in the U.S. haven’t learned this lesson and mistakenly believe America is losing the digital currency space race because we don’t have a CBDC. This would be funny if the stakes weren’t so high and the belief so wrong: America is winning the digital currency space race.
The private sector has taken the lead
Part of winning any race is getting a jump off the start line. Well, privately-issued, dollar-referenced payment stablecoins were in circulation years before China issued their digital currency. And they have gained significant market adoption. About $54 billion worth of USDC is in circulation, double what it was a year ago. This is advancing the role of the U.S. dollar.
What’s more, a recent study by Deloitte showed that 75% of merchants plan on accepting stablecoins as payments in the next two years, in large part because of the lower fees associated with using blockchain-based payments. So if privately-issued stablecoins are growing in usage, and starting to seep into traditional commerce, what need would a CBDC solve?
You could easily imagine a world where there is a proliferation of a variety of privately-issued payment stablecoins, backed by yen or ringgit or the currency of any other country in Asia. Of course, innovation alone is not enough.
Governments need to craft clear rules of the road to make sure any payment stablecoin and payment stablecoin issuer is properly regulated. One-to-one backing with high quality liquid assets, regular public disclosure of reserves, and other accountability measures will help build trust with the public. That’s what we are advocating for, starting in the United States.
It is unclear which country will win the digital currency space race. But two things are clear: Not every country in Asia is adopting China’s model, so an East vs. West framing does not tell the whole story. And the United States has a big head start because of responsible, private-sector innovation and increasing public-sector oversight.
Jared A. Favole is a senior director at Circle Internet Financial, a global financial technology firm and the sole issuer of USD Coin (USDC) and Euro Coin (EUROC).