Event 1: US Fed shares its thoughts about a digital dollar
In a much anticipated discussion paper released last week, the US Federal Reserve (nicknamed the Fed)—arguably the most important central bank in the world—laid out its thinking on a digital dollar.
While the Fed has made no firm conclusion on whether it should create one, the discussion paper observed that the issuance of a digital dollar “would represent a highly significant innovation in American money.”
At its core, the Fed’s ambitions for a central bank digital currency (CBDC) rely on an intermediated (using commercial banks, private partners for distribution) approach for a public-facing digital dollar. In addition to using intermediaries, the central bank demarcated three other pillars that the CBDC must deliver on:
- Privacy-protection: The Fed noted that a CBDC will need to strike the appropriate balance between safeguarding privacy and allowing for enough transparency to deter criminal activity.
- Transferable: It should be readily moveable between customers and different intermediaries.
- Identity-verified: In practice, intermediaries (like commercial banks or Visa/Mastercard) would need to verify the identity of a person using a digital dollar, just as banks currently verify customer identities.
Reacting to the paper released by the US central bank, analysts at Bank of America (BofA) predicted in a Monday report that the United States will likely issue a digital currency of its own between 2025 and 2030. Such an issuance will also help preserve the dollar’s status as the world’s reserve currency, they noted.
There are other approving noises. “While elsewhere such central bank digital currencies can appear ‘a solution in search of a problem’, America’s lacklustre retail banking system and the importance of the dollar in cross-border money flows make an obvious case for reform,” observed an opinion piece from the editorial board at the Financial Times. The piece argues that while the US central bank has been cautiously slow on digital currencies compared to its peers in China or Europe, it cannot remain a laggard forever.
My personal takeaway on CBDCs so far has been that they’re much ado about nothing if the main objective is to make payments more efficient. There are cheaper ways to do that, Indian’s United Payments Interface (UPI) and Thailand’s PromptPay being two prominent examples. And making cross-border payments better via CBDCs will require immense coordination on rules and standards between central banks of the world.
But, the “cannot remain a laggard forever” sentiment seems to be pushing the Fed’s CBDC ambitions for now.
Which brings us to the second event we’re looking at this week.
Event 2: Internet giants eye the next transaction business
- Twitter has started to allow users to use NFT-linked art as profile pictures.
- Facebook and Instagram are working on plans that will allow users to mint and sell NFTs.
- And, YouTube is exploring adding NFT features for video creators on the platform.
For the uninitiated, non-fungible tokens (NFT) are digital tokens that represent ownership of digital items such as an image or a video clip. If you’d like to know more about NFTs, you can check out this October edition of Tokenised where we looked deeper into them.
Coming back to the social media giants though, their move towards NFTs seems to have been spurred by the desire to cash-in on a booming market that has grown to be worth over US$40 billion. By comparison, the traditional art market saw activity worth US$50 billion last year.
While Twitter has bundled the NFT functionality with its Twitter Blue subscription, Financial Times reported that Meta (formerly Facebook) and Instagram have also discussed launching NFT marketplaces. Such platforms are likely to work on a model resembling OpenSea’s—acting like a trusted intermediary for exchange while also taking a bite out of the transaction value. The largest NFT marketplace, OpenSea currently charges a 2.5% fee on each transaction that occurs on its platform.
YouTube, meanwhile, hasn’t specified how it will roll out or monetise its potential NFT play. Nevertheless, this marks parent firm Alphabet Inc.’s first foray into crypto activity after having kept it at arm’s length for quite some time.
Now, the entry of old internet giants into a new internet business is perhaps the least surprising move of all. But amusingly enough, as in the case of the Fed, it is a fear of being left behind that is driving the ambitious plays at social media companies.
Common Thread
And that’s why I chose to write about these two seemingly separate events in conjunction. In many ways, that’s what crypto’s narrative has been for the longest time: ‘the train is leaving the station, you better get on.’
But what puzzles me deeply—and maybe this is just me—is how people will react to such activity. In many ways, the entry of big players like Twitter, Facebook, and YouTube, will eat at the libertarian roots that crypto platforms are so proud of touting. That said, a lingering question continues to be whether most people actually care about ideas like decentralisation, or reducing monopoly tech power, or whether it’s all just a matter of who can make it the easiest for users to play with the next shiny, new thing.
As for CBDCs, they’re largely motivated by the need to counter a rising threat. For countries like Nigeria, issuing a CBDC is about fighting the appeal of a non-localised reserve asset—like Bitcoin or dollar-pegged stablecoins. And for nations like the United States, it’s about fending off a potential challenge to the dollar’s reserve status and upgrading payments architecture.
In many ways, both these reactions are consistent with what crypto-assets have spurred since they broke into the limelight. There’s a new thing on the block that seems to be good business and stakeholders react in one of two ways: either try to co-opt it, or design something of their own to counter it.
With that, let’s turn to a few other things that happened in crypto over the last few days.
