Central banks across the world have started to implement CBDCs (Central Bank Digital Currencies), the sovereign equivalent of cryptocurrencies such as Bitcoin and Ethereum. The idea behind them is that they are issued and controlled by a country’s central bank and used by individuals and businesses for retail payments in the same way as cash, but digitally, as well as for wholesale settlements in the interbank market. The increasing momentum of CBDCs has been driven by central banks’ specific market challenges presented by existing payments infrastructures and the desire to promote financial inclusion and innovation.
As fiat currencies were created in a much less globalised world, they were not designed to deal with both today’s and future challenges, either domestically or internationally, hence the necessity for central banks to evolve is apparent. In the following interview, B2Broker CEO and Founder, Arthur Azizov, addresses these issues and shares his opinions on the role of CBDCs and where they are headed.
Let’s start with the USA, one of the most influential countries in the crypto economy. What is your opinion on its attitude to CDBCs?
The USA introduced the digital dollar a long time ago. If you look back to 2018, the short history of the USDC can be clearly traced. This was the first country with a trust license that opened an account with a custodian bank, started accepting dollars as collateral for crypto and issuing stablecoins with the amount of dollars received. Thus, the USA allowed the dollar to be put into the circulation of the global crypto economy. It was a far-sighted move, since as far back as 2017, everyone realised that regardless of SEC’s stance on crypto, a lot of crypto campaigns were permitted, with FinCEN registration being adequate. The USA has long been the catalyst for cryptoeconomics.
What does USDC have to do with government currencies?
The capitalization of USDC already stands at more than $10 billion. This means that there is a vast amount of money in custodial accounts. The coin secured by this money circulates throughout the crypto economy and is super-liquid. The USA has gained control of a private company and the issuer of the token. The function of this contract is the freezing accounts and blocking transactions and addresses. USD coin is actually one of the CDBC formats, i.e. it is not a direct dollar of the Federal Reserve system, but a company with a trust license with the money being deposited into accounts by institutional and private clients.
There are definitely pros and cons
The downside is that not everyone uses it because of concerns about blocking addresses. This is not the case with Bitcoin, as it is decentralised. USD coin has blocked many addresses - they work with FinCEN so everyone is obliged to pass KYC, and companies are urged to report suspicious transactions. On the basis of this they carry out investigations and make decisions on blocking addresses and help to create lists of sanctioned crypto addresses that all companies are required to block.
Even without introducing CDBC, the USA is closely involved in the crypto economy. It made the decision not to exclude the dollar from this chain, but to firmly integrate it. There are many USDC followers including PAX and Gemini.
How about Europe?
In 2017, Europe issued the first directive that cryptocurrency is not money and therefore not a form of payment. However, it is regarded as a commodity and there are no restrictions. Many Europeans are very loyal to cryptocurrencies. In Estonia for example, there are thousands of large crypto companies in existence. The banks themselves do not offer cryptocurrencies, but do offer payment cards to B2B customers so they can serve the corporate sector and retailers. Everything is within the framework of SEPA which follows the format of passing a full-fledged KYC and ensures every aspect is completely covered.
What about dirty money concerns?
One of the reasons why Europe and the USA are not worried about dirty money is that it cannot harm the state. Money circulates faster, companies become more mobile, there are more jobs, spending increases, commissions increase and taxes increase. As for AMD (anti-money laundering), companies such as Crystal, Chain Analysis and Supertrace exist who conduct analytics for each blockchain in order to understand the addresses and identify those addresses belonging to darknet websites, etc. FinCEN and the European directive require the passing of a thorough KYC, which means having data regarding who owns the account: addresses and wallets, and matching this data with their systems. Chain Analysis has around 150 analysts making small purchases on darknet forums, trying to understand root addresses, where the money flows, assigning score ratings to addresses with 10 being the highest, for example. A green score given by a company means that it is not in any way associated with red i.e. flagged addresses. Sanction lists are also created.
A country may have around 20 regulated crypto exchanges, for example. All users of these crypto exchanges have to do KYC as a necessity regardless of the amount involved. When both the receiver and the sender are known there is a transaction hash. It will all come to the point where all the same wallets that exist now will be subject to the mandatory KYC. There will be a choice to try to remain anonymous, but soon that will not be possible. Now it is obtained thanks to cash. With CDBC there will be other advantages by completely eliminating cash from circulation: printing is expensive, servicing is expensive and there is a huge risk of cash fraud and counterfeiting. It is worth switching to CDBC as all these problems will disappear. You will not be able to make a corrupt transaction, because if there is no cash in the market, it will not be possible for any to pass any of it onto you! There will probably be other ways instead, like giving you my car or giving it to your wife: everything will collapse.
There will be a kind of unified KYC database - some kind of ID, as there is now with public services. Everything will become completely open and all information will be made available. The government wants to remove cash but a huge number of transactions are still being made through it. Its service is a relic of the past when you take into account cashiers, queues, and so on. In a developed country, the police are more likely to be called if you go to a bank with $1 million in cash.
China has been working on the creation of a national digital currency for a long time. How far advanced are they?
In China, the CDBC issue is even more acute. In 2017, they banned the use of crypto, but allowed the use of blockchain technology. Then they went further than all other countries, developing a digital yuan system, and launched it in the economy. In several cities, pilot projects have been conducted with red envelopes distributed to 50,000 people. All merchants were required to accept digital yuan and tens of millions of transactions have already been made. In a couple of years there will be no cash left in China. Already, ICBC, Bank of China, and agricultural banks have started opening crypto-wallets for the digital yuan. Progress there has been really fast.
For any country, this is a huge opportunity. What do you think we will see in the near future?
For every country, this is a huge opportunity to rectify a situation that they now find themselves in. As I have stated, cash is a relic of the past. Cards are convenient, fast and cool. Mastercard has announced that it will support crypto payments as with the advent of crypto and many companies have made the switch to crypto transactions e.g marketing departments may pay for their media buying with crypto. There are also companies that help to conduct transactions in crypto with special programs written for accounting purposes to assist with this process. Mastercard understands that in 2020, crypto is growing, as is its capitalization and the number of transactions. These users previously used cards but are now faced with little choice but to evolve or their business will not remain competitive. Banks, and especially Russian banks, will understand this all too well. The disadvantages for users are evident: full centralization, control, transparency, and the important issue of security. But even now we are seeing that many companies do not store crypto themselves, but use custodian banks instead who are obliged to store it in bunkers and cold wallets under protection. We can expect to see the same happen with banks. The transition will be imperceptible and at some point, central banks will make an announcement that cash is no longer available. Within two years, I believe it will be necessary to exchange crypto ruble or dollar cash, for example.
Arthur is the CEO and Founder of B2Broker, a technology and liquidity provider which specialises in the sphere of B2B services and products. B2Broker helps brokerage and exchange firms empower their businesses by connecting them to the markets and providing them with innovative and cutting edge technologies. The company’s advanced base of ready to use technical solutions is used by a wide range of clients such as large licensed brokers, crypto exchanges, crypto brokers, forex brokers, hedge and crypto funds and professional managers.
As a regular speaker at leading industry events, Arthur will take centre stage at iFX Expo Dubai on 19th -20th May, 2021, where he will present a speech on the general state of the cryptocurrency industry as well as reviewing other trending topic areas such as stable coins and CBDCs.