A few years ago if you were to talk about governments being able to control your money and impose travel restrictions on their citizens most people would roll their eyes and ask where your tin foil hat was. These days however the dystopian future dreamt of by science fiction authors is rapidly becoming a reality.
When it comes to dystopian visions of society and governmental overreach, most people’s first thoughts turn to China. Although they may be ahead of the curve at the moment, their path to a digital future is one that is being closely monitored and may soon be replicated by other governments. As Christine Lagarde recently said, “We are certainly not ahead of the game because PBOC in China is ahead of us and a few others, but we are not doing badly in terms of timetable and we are sticking to it.”
The reason Christine’s comments are important isn’t just because she’s the head of the European Central Bank (ECB), but also because she’s closely connected to the global financial system. Prior to becoming the President of the ECB in 2019, she was the Managing Director of the International Monetary Fund (IMF) between 2011 and 2019.
The IMF was created at the same time the World Bank and the Bretton Woods agreement were established. This moved the global financial system onto the present US Dollar based system. The IMF’s role wasn’t just to restructure the world’s financial system, but to ensure it remained in place and that international transactions were settled in US Dollars.
You don’t become the Managing Director of the IMF and President of the ECB if your views aren’t wholeheartedly aligned with the present financial system. Therefore Christine’s comments on the introduction of blockchain technology into the legacy financial system represent an approach of using it to maintain the status quo, not revolutionizing global finances.
As for who is driving this change Christine explains that it’s commercial banks, not regulators or politicians who are directing this transition. She said, “The settlement structure on which we operate, which has a dimension of digital about it, needs to be significantly upgraded and needs to be made more digital than it is at the moment. In that respect, if the counter-parties, if the commercial banks with which we operate, expect distributed ledger technology to be part of the improved infrastructure to payments then we should certainly be open to it and be prepared to endorse the digital ledger technology as part of this improved infrastructure.”
Despite hopes for a wave of political change in the US following the mid-term elections, it’s looking unlikely that pro-crypto lobbying will have had a significant effect. Although some pro-crypto politicians will be taking office it’s clear that the adoption of crypto technology into existing payment systems is being decided by banks, not regulators.
The function of regulators appears to be to try and slow innovation in the space significantly so that banks have sufficient time to integrate the technology and cement their foothold. Having spoken with a source closely involved with the Social Development Bank of Saudi Arabia they confirmed they are in the process of integrating a private blockchain into their operations.
They explained, “Currently there are around fourteen steps involved in the release of loans to clients which depend on documents being checked, and the process is open to misuse and inefficiencies. By using a digital wallet and smart contracts we can code those steps into each tranche payment. This will make it highly efficient, easily auditable, and automated. There’s no doubt at all that cryptocurrency technology will be the basis of banking systems throughout the world in the next decade.” He added, “What we’re doing in Saudi is being watched by other banks overseas. We’re testing what they will implement in the coming years.”
When speaking with people connected to the banking systems and financial markets their attitude is one of open acceptance of blockchain technology. They see it as indispensable for the future. Yet in the public arena, the narrative is that blockchain and crypto are inherently risky and should be avoided at all costs until regulators have made it safe. Exactly what the landscape of a safe crypto environment looks like is the troubling aspect of present developments.
In China, the PBOC is continuing with the rollout of its CBDC and has found an innovative way to ensure mass adoption, especially amongst its more elderly population. Traditionally when any government tries to transition to an alternative technology they struggle to get older people to use it. They could try to directly enforce its adoption, but that won’t work in more liberal societies, so instead, they opted for a more circuitous route.
Instead of forcing everyone to buy a mobile phone and download a digital wallet, the Chinese government used the Covid-19 pandemic to implement a digital travel passport. In order to travel between, or even within, cities people have to prove they have a negative covid test by scanning their QR code at various access points.
Rather than creating their own independent app for the QR code, they partnered with Alipay and WeChat which make up over 90% of the mobile payment market in China. They later partnered with both apps again when it came to the rollout of the e-CNY. This move ensures the government can control and monitor most aspects of people’s travel and spending.
A recent example of this was in June when the Chinese government wanted to stop people protesting about banking issues. CNN reported that several protestors had set out on their journey to protest with green health QR codes which then turned red on arrival to Zhengzhou. [https://edition.cnn.com/2022/06/15/china/china-zhengzhou-bank-fraud-health-code-protest-intl-hnk/index.html]
While no one expects western governments to be as extreme as China in their implementation of the technology, alarm bells are starting to ring about the way the present narrative is being manipulated. Openly central bankers and regulators say that crypto is dangerous whilst at the same time working with commercial banks to ensure it’s adopted.
They already have a largely complicit society that is willing to use covid apps in order to travel and access services. Integrating a CBDC and ensuring that private banks maintain their market share of transaction processing seems almost inevitable. Unfortunately for the crypto space examples such as LUNA and FTX provide all the ammunition regulators and politicians need to keep the public scared of crypto and in favor of regulations.