BackCentral bank digital currencies can go global with shared IDs
An ID verification system for vax passports could offer a template
PremiumDigital currencies are almost here, with China’s e-CNY possibly off the block as early as the 2022 Beijing Winter Olympics. But among the many things we still don’t know about these new payment instruments is their usage overseas: How helpful will one country’s digital cash be in another? All we know is that it will be a direct claim on a central bank, like regular cash. But there the similarity ends. Money-changers are ready to swap—for a fat fee—our banknotes for [foreign money]. However, if cash resides in a wallet on our smartphones, tourists may not be able to spend it overseas if merchants aren’t allowed to receive foreign digital currencies.
Commercial banks have solved this problem. By using intermediaries like Visa and PayPal, they’ve made our claims acceptable as payments in other countries. But for monetary authorities to do this, each will need a way to verify the identities of 8 billion people. That’s because, in theory, anyone on the planet can land in any country with purchasing power acquired abroad.
Unlike cash, or cryptos like Bitcoin, digital money issued by central banks won’t be pure tokens. Either the issuing monetary authority or private players it tasks with the job will keep debit and credit accounts. Accounts involve identities, and, in an international setting—questions arise of money laundering, terror financing, etc.
China’s digital yuan trials with foreign athletes next year will probably involve giving them some e-CNY to spend locally. That’s just marketing. It’s when the Chinese try to use it overseas that the challenges of sharing identities across borders will become complex. Beijing wants to promote the currency as a global alternative to the US dollar. But what if the US Fed wants access to a database that would check the identities of all Chinese visitors in the US, potentially tracking what they’re buying? Will Washington tolerate the same of a digital dollar?
There are three ways out of the logjam, according to the Bank for International Settlements (BIS). The simplest solution may be for different payment authorities to enhance compatibility of their technical and regulatory standards. Further, they can interlink their systems and share some interfaces, eliminating middlemen. Finally, they can get together on one platform for their independent digital currencies. Each of the three approaches “would require increasingly intertwined identification schemes, but in all cases, ID would remain at a national level," the BIS says.
The third model—a jointly operated payment system supporting multiple central bank digital currencies—is the most promising from a user’s perspective. After Hong Kong’s monetary authority began experimenting with the Bank of Thailand to develop a common platform, they were joined by China’s and the UAE’s central banks. The project is now called m-CBDC Bridge. Even in such a highly cooperative setup, a single ID system would not be needed, the BIS says.
It’s unlikely that the US and China will agree to join their digital currencies at the hip, given their mutual distrust. What then?
The pandemic may offer clues. My vaccination certificate in Hong Kong sits on my Apple Wallet, with name and identity numbers partially masked. It has a tamper-proof QR code, which can be read by immigration authorities. To achieve this, Apple and the health authority had to verify my identity via my phone number and unique Hong Kong ID. So long as other countries recognize Hong Kong’s e-certificates, protected by the phone’s facial or fingerprint verification, they’d be accepted for international travel.
A similar system could work for international payments with digital cash. For a cup of coffee, it should be sufficient that a national authority has verified that you are who you say you are, and you have what you say you do: unspent money. As long as the country accepting foreign digital cash is satisfied with the issuing authority’s anti-money-laundering standards, nothing more is required. The Fed can credit the cafe’s wallet with FedCoin and the People’s Bank of China can debit e-CNY from yours, and the two can settle their accounts without telling each other anything more about you. Travellers would save money this way, too.
Without this level of coordination, e-CNY, FedCoin, Britcoin and a digital euro will all remain trapped in silos, making them non-starters in a globalized world and paving the way for the likes of Diem, synthetic private-sector tokens backed by reserves maintained in one or several official currencies. The growing popularity of cryptocurrencies is already a headache for central banks; they won’t want their legal tender to lose out to these so-called stablecoins. So they’ll cooperate—even if they don’t collaborate.
Your country’s digital cash may be more welcome in some places than others. But it’ll work everywhere.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services.
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