With help from Derek Robertson
In January, this newsletter took a look at emerging ideas for state-backed digital money — speculating that a new breed of e-money was poised to take the center of the global stage.
As we cross the mid-year threshold, a slew of developments from the U.S., Europe and the rest of the world show that the future of state-backed money is starting to crystallize.
By and large — despite the many obstacles to these technically demanding and politically sensitive overhauls — the world’s monetary authorities are demonstrating that they remain determined to move them forward.
Here are three takeaways from the current state of play.
Wholesale remains an easier sell. On Thursday, the New York Fed and its partners announced that a three-month digital dollar pilot for global payments had shown promising results.
This represented a notable spurt of progress in American monetary innovation, and it’s no surprise it came on the wholesale side of central bank digital currencies, which pertains to transactions between financial institutions.
Up to now, the U.S. has lagged much of the rest of the world in CBDC development. In part because the stewards of the global reserve currency have less to gain from changes to the monetary status quo. But it hasn’t helped that the idea of a CBDC has encountered populist opposition in the U.S., where opponents have speculated it could be used to impose a restrictive social-credit system.
Even in Europe, which is well ahead of the U.S. in its CBDC development, privacy concerns are proving a sticking point. When the European Commission unveiled draft CBDC legislation late last month, one commissioner felt compelled to declare to reporters, “This is not a Big Brother project.”
But such concerns are much more relevant to retail CBDCs, which are meant for use by individual citizens, leaving a path open for wholesale projects like the New York Fed’s.
Geopolitics is driving tech developments. Last week, Russian state sources reported that the emerging BRICS [Brazil, Russia, India, China, South Africa] economies are planning to introduce a new gold-backed currency at the bloc’s summit next month in South Africa.
The reports contradict comments made last week by an executive at the BRICS development bank, Leslie Maasdorp, who told Bloomberg TV on Wednesday that a new shared BRICS currency remains a “medium- to long term-ambition.”
The Russian state reports may represent wishful thinking, but they reflect the sustained desire of non-Western nations to develop alternative monetary arrangements to the dollar system, particularly in the wake of U.S. sanctions of Russia over its Ukraine invasion.
That has spurred many countries to accelerate their exploration of CBDCs — including calls for a gold-backed digital BRICS currency — which in turn has heightened the urgency around the West’s own CBDC efforts.
“Once the U.S. and Europe saw these developments, they became much more engaged as well,” said Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center, which publishes the think tank’s CBDC tracker.
Governments are borrowing from crypto. As governments pursue digital upgrades of their currencies, one open question has been how much they will borrow from the wild world of crypto.
Crypto skeptics view most blockchain-based innovations as useless, while many crypto purists argue that there is little point to use a blockchain for a system in which government authorities retain control.
“They keep on wasting money and resources and time,” argued Sam Callahan, lead analyst at Bitcoin-only investment firm Swan Bitcoin.
So it’s noteworthy that the successful experiment reported last week by the New York Fed and its partners made use of a (private, permissioned) blockchain — a design element that many CBDC projects eschew.
Central banks also remain interested in some of the more exotic innovations to come out of decentralized finance, as demonstrated by an interim report published late last month by Project Mariana, a collaboration between the Bank for International Settlements and monetary authorities in Europe and Asia exploring digital upgrades to foreign exchange markets.
The interim report confirms that the initiative is continuing to incorporate crypto-native innovations like liquidity pools, automatic market makers, and cross-chain bridges.
That’s notable because many of these elements have been associated with some of crypto’s most spectacular failures.
For example, bridges, tools for making separate blockchain networks interoperable, are notorious as weak links that hackers have repeatedly exploited to steal crypto funds. (The Bank for International Settlements published a report about defending CBDCs from cyberattacks on Friday.)
While “crypto” and associated terms have acquired a taint that makes them politically unpalatable in many corners, the world’s monetary technocrats remain willing to try all available tools in the race to build the financial systems of the future.
An influential AI commentator has some advice for the U.K.’s big new regulatory push.
Jack Clark, a former policy director for OpenAI and author of the Import AI newsletter, outlined in a recent blog post how he thinks Great Britain’s £100 million “Foundation Model Taskforce” should approach its sweepingly ambitious mission of building a regulatory bridge between the U.S. and Europe.
His self-described “tl;dr,” the technical elements of which are broken down in more detail at the actual blog: the task force “should focus on evaluating frontier models. Specifically, it should suss out unknown capabilities, explore whether dangerous capabilities are possible to elicit from contemporary models, evaluate for alignment (or misalignment), better develop the science of measurement (including socio technical analysis) and experiment with different approaches to both accessing AI models and aligning AI models.”
Clark explains that he writes out of a belief that a “public option” for developing superintelligent AI is possible, but only if governments are given serious regulatory capacity over the sector and develop the commensurate technical know-how. “By public option I don’t mean state-run-AI… but I do mean a version of AI deployment which involves more input and leverage from the public, academia, and governments, and I mean something different to today where most decisions about AI are being made via a narrow set of actors (companies) in isolation of broader considerations and equities,” Clark writes. — Derek Robertson
Oh, and another voice chiming in: Former Department of the Treasury counselor Steven Rattner published an op-ed in the New York Times this morning calling for “full speed ahead” on AI as a boost to the American economy.
Rattner, a former banker who played a key role in the U.S.’ recovery from the Great Recession, writes “the problem is not that we have too much technology; it’s that we have too little” — and that automation could nudge American productivity out of its long downward spiral.
“This makes A.I. a must-have, not just a nice-to-have. We can only achieve lasting economic progress and rising standards of living by increasing how much each worker produces,” Rattner writes. “Technology… is central to that objective.”
He’s mindful, however, of its impact on workers, noting how post-industrial disgruntlement in the Midwest quite literally made recent history with Trump’s election, and that “Government can help ameliorate these dislocations,” and meet “a vast need for better education and training.” — Derek Robertson
Stay in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Mohar Chatterjee ([email protected]); and Steve Heuser ([email protected]). Follow us @DigitalFuture on Twitter.
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