In an exclusive interview with International Finance, Brett King, founder and CEO of The Futurists Network, Fintech Hall of Fame inductee, and policy advisor to global leaders, including the Obama administration, President Xi’s advisory ecosystem, and GCC governments, shares his perspective on how artificial intelligence is reshaping money, power, and the global financial order.

You have long predicted shifts in financial systems. Are we now entering an era where artificial intelligence becomes the core decision-maker in finance rather than human-led institutions?

Yes, we are witnessing the end of human-led decision-making in banking. We are seeing multiple agentic platforms being deployed right now at scale, including OpenClaw, PayPal, Stripe, Mastercard and others. So, it’s fairly inevitable that we’ll need fit-for-purpose banking. This requires agentic finance and native AI capabilities, which will exclude most banks in their current technical state. By 2035, agentic banking will be mainstream as neo-banking is mainstream today.

When we discuss the future of money, is the real transformation about innovation, or about who controls financial power?

There is no future for money as we think of it today. The more automation that is put in the system, the less value fiat currency provides, as it is not machine-readable, nor can it move without human intervention. We need smart money, which will include stablecoins, CBDCs, tokens (deposit, utility, etc), and eventually, AI marketplaces will further iterate on digital money.

As AI begins to drive lending, underwriting, and investment decisions, who ultimately holds accountability, the institution, the algorithm, or the data ecosystem behind it?

The institution will hold responsibility, but we will need both human and AI oversight functions to ensure these algorithms work. Ultimately, the quality of the data will determine how well these decisions can be automated. This is why data lakes and foundation models are really critical in the medium term.

Do you believe algorithmic trust can realistically replace traditional trust in banks, and what risks come with that shift?

Absolutely. Firstly, trust in banks will convert to trust in algorithms over time, just as it did with credit cards online, and online banking. Today, we see neobanks and wallets with higher trust scores than traditional banks, which is a good indication of the path artificial intelligence will take.

Could AI-led finance democratise access to capital globally, or will it deepen the concentration of power among a few dominant players?

Both. The core problem is not the democratisation of capital as much as it is AI’s potential to replace human capital. Which is why we hear many of the tech ‘broligarchy’ talking about Universal Basic Income. The fact is, wealth distribution is the biggest issue for AI at scale moving forward, not access to capital per se. But, at the same time, there will never be an easier time to start your own business or launch a product in the world.

If artificial intelligence becomes the primary gatekeeper of financial access, how do we address the risk of bias and ensure fairness at scale?

We completely need to rethink financial access in this world, but access to AI won’t be restricted by bias. All you will need is an internet connection and a smartphone. By 2030, 99% of the planet will have that capability (projected). The issues with biases are still present in datasets today, but people are self-selecting platforms that focus on accessibility and speed of access. This is why Revolut is now approaching the milestone of being the largest retail bank (by customers) in Europe, and why Ant Group and NuBank have already taken that status in their markets.

With the rise of Central Bank Digital Currencies (CBDCs), are governments enhancing efficiency, or expanding control over how money is used?

CBDCs do not give much greater control over how money is used from the account and fraud structures we have today, although they do allow central banks more direct control over the use of the currency and policy mechanisms connected to CBDCs. The key to understanding is that you can’t run autonomous systems on fiat currency on a traditional core – they are not fit for purpose. You can create translation layers and so forth, but CBDCs can be purpose-built to mirror trade agreements, for example, allowing only for cross-border transfers consistent with said agreements – programmable money that is policy and process enforced. This allows for much greater use of safety rails and mechanisms on autonomous cross-border trade that we don’t have with fiat. Various players, such as the CEO of Circle, have said we’ll likely have to move to rollback models over time, so that current payment rails don’t support either. So, this is all fit-for-purpose money design.

How concerned should we be about the idea of programmable money being used to influence or restrict economic behaviour?

Again, the banks can restrict money from an individual account to entire countries right now, today. So, this is not the systemic risk it would appear to be. Remember, we will need the ability to stop agentic AI-based criminal organisations using AI to scale crime, which we cannot do with today’s rails and account structures. So, we are actually at much greater risk of fraud and crime without programmable money.

Do CBDCs have the potential to genuinely improve financial inclusion, or could they unintentionally weaken the role of commercial banks?

We are already seeing the impact of potential yield from stablecoins being a big destabilising element for traditional deposits, but CBDCs essentially allow anyone with a government ID to have access to basic banking services. So, the answer is, both will happen simultaneously.

Between banks, Big Tech, and governments, which entity do you believe is best positioned to dominate the future financial ecosystem, and why?

The two determinants of success in this world are speed and technical agility. Speed will be defined by your organisation’s culture (how quickly artificial intelligence can be integrated), your tech stack, and how much of it is AI-ready. Banks with on-premise mainframes without access to the cloud or without multi-year digital transformation experience will really suffer through this transition, as they will quickly become less relevant from a systemic perspective. The other issue is market share and those natural shifts. Today, digital banks like NuBank, Revolut, Starling, Chime and others are dominating in their markets because of their ability to acquire customers at scale. AI is going to supercharge that capability, and banks reliant on traditional distribution will simply continue to lose customers pretty rapidly.

For example, HSBC, one of the world’s top 20 banks since the 1980s, has 38 million customers globally. And that has remained stable for the last decade, but Revolut has already hit 70 million in that same timeframe. Next, we will see how AI advisory shifts AuM to digital platforms away from product-based banks.

Are we moving toward a model where banks become invisible infrastructure while technology companies own the customer interface?

Yes, absolutely. Banks are either going to be data stores or data pipes, but they won’t own the personal AI clients at the front end. This is a bigger shift than most people realise. In 10 years, you’ll interact with your AI, and it will execute on your banking and money management, health management, all the administrative elements of your life – you won’t use apps. Interfaces will essentially be liquid/generative, sort of chunks of functionality driven by context and the AI. So, you won’t use banking apps like you do today. Your personal AI agent will interact with the bank agent on your behalf. Only when it needs your input will you get something resembling an interaction with a bank today, but it will be minimal.

Do regulators today have the capability to effectively oversee AI-driven financial systems, or are they already falling behind innovation?

Regulators need to be aware of the technology infrastructure in the future. Humans will simply not be able to supervise an AI-based system of this complexity and the speed of artificial intelligence. Most regulators are falling behind, but likely, regulation will start to coalesce into regulatory zones with common policy/process and infrastructure requirements. You need agentic regulation to run agentic banking, not human-based regulation. Also, policy will need to be a feedback loop process, where the data shows trends, the agent model and guardrails are tweaked, and the code is refined. We won’t be going to the Senate or Parliament to enact policy like we do today – it will all be in code.

Could artificial intelligence and digital currencies accelerate a shift in global financial power away from traditional economic leaders?

Yes, but likely, China will lead the world in terms of the adaptiveness of their economy from an embedded AI/Autonomous finance perspective, just because of the level of investment they are making in infrastructure, including next-generation energy systems and distributed edge compute.

Where is the US falling short today in terms of preparing for this future?

The big oil/gas lobby has restricted renewables deployment in the US, which leaves the US grid under immense strain as automation demands for energy grow. Secondly, the US remains the only G20 country to not have a dedicated fintech charter and widespread real-time payments adoption. Both would be required in the near term.

In an AI-first world, how do you see the very definition of money evolving; will it remain a static store of value, or become a dynamic, programmable asset?

Data will be the new money in many ways. For example, in the mid 2030s, expect longevity to be a big theme for the developed world. Your health data becomes just as valuable as money in that scenario. Thus, the question is how data and money work together in this new system. The reality is that the more automation we put into the world, the less utility money itself will have. It’s highly unlikely that in 60 years we’ll use money at all in most parts of the world.

Could we see a future where AI agents transact, invest, and manage money autonomously on our behalf, and what does that mean for human control over finance?

Absolutely. Control is overrated. Efficiency of capital deployment, maximisation of returns and minimisation of risk are far more critical, and this is where artificial intelligence will excel, and outperform humans consistently and absolutely. Just like you won’t trust a doctor not using AI in a few years’ time, you won’t trust a bank that doesn’t use AI to manage your money in the future.

Are we heading toward a fragmented global financial system driven by competing digital currencies and geopolitical tensions?

We are already in a multipolar geopolitical world. In one of my reports, I have described the impact of the Iran war and general large-scale systems automation. Ian Bremmer, a highly regarded political commentator out of NYC, talks about the technology cold war we are entering into between the US tech giants and distributed Chinese tech. By 2050, the largest economies in the world will be smart economies, managed by AI. Extremely resource efficient, by today’s standards, but much more energy dependent – this is why the US is not likely to win this in the long term.

What’s the biggest unspoken risk in AI-led financial systems that policymakers may be underestimating today?

Ethics. It is hard to code ethical guardrails into AI because we can’t even agree on ethics as humans. Take issues like abortion, transgender kids, vaccines, etc – how do you manage the ethics of those issues in AI when humans themselves can’t find agreement.

What is one prediction about the future of money that most people underestimate today, but will soon become reality?

Artificial intelligence is the end of capitalism as we know it. AI has one central tenet in respect to its design — that is to automate at scale, eliminating human labour wherever possible. The most efficient business is a human-less corporation. Sam Altman talks about the single-person unicorn as a fact yet to be confirmed, but totally possible. The US Fed chairman has already said AI is eliminating hirings for entry-level positions across the S&P 500 today. This put us on a trajectory where AI generates massive technology unemployment fairly quickly globally. If you have large-scale unemployment due to AI, the basic tenets of capitalism no longer work. That’s why we hear proposals for Universal Basic Income and other things as ways to keep consumers consuming in an AI world. We need new, flexible thinking on our economic and policy models that isn’t simply capitalism versus socialism. We need new types of systems thinking to adapt to this.

The post ‘AI is definitely the future of banking, but the challenge is ethics’ appeared first on International Finance.

Blockchain is opening up new money flows, cross-border transactions are speeding up, and artificial intelligence (AI) is revolutionising financial processes. At the same time, businesses are being forced by regulatory changes to incorporate compliance technology, which will ensure their resilience at a time of increased scrutiny.

B2B finance is at a turning point. In addition to changing the financial infrastructure, the convergence of these advances is radically changing how businesses control risk, streamline processes, and spur expansion.

Businesses that successfully use fintech solutions will have a competitive advantage, while those that don’t adjust quickly run the risk of becoming obsolete in the rapidly digitalised financial sector.

The quickening of business payments

As businesses seek quicker, more affordable solutions, the global payment infrastructure is changing. By the end of 2025, it is anticipated that the total number of cross-border blockchain transactions will have increased by 48% year over year to $5 trillion. The demand for smooth, real-time settlement solutions is expected to propel the worldwide payment processing industry, valued at $79.6 billion in 2024, to more than double, reaching $161.9 billion by 2030.

In addition to speeding up transactions, this development is forcing companies to reconsider their financial arrangements and hastening the use of financial products based on blockchain technology to improve liquidity management and maximise cash flow. This growing reliance on digital assets is ushering in a more automated and decentralised corporate finance ecosystem.

Digital asset usage in corporate finance is becoming a strategic imperative rather than just conjecture. Blockchain technology is used by financial institutions and global firms to improve security, liquidity management, and transaction efficiency.

Early blockchain projects were mostly limited to experimental pilots, but due to institutional demand, regulatory changes, and cost-saving advantages, corporate adoption has now moved to full-scale implementation.

Due to growing corporate adoption, the financial blockchain market is expected to reach $49.2 billion by 2030. Tokenisation is driving this change, as companies digitise financial instruments, commodities, and real estate to enhance liquidity and tradability.

Experts predict that the demand for tokenised assets will surpass $600 billion. Tokenised assets are already being incorporated by businesses into trade settlement, supply chain finance, and cross-border transactions, which lowers counterparty risks and shortens settlement times from days to seconds.

At the forefront of this change are institutions. Leading exchanges are modifying their models to include institutional-grade digital assets, while international banks and asset managers are introducing tokenisation platforms to enable blockchain-based financial instruments. The distinction between decentralised finance (DeFi) and traditional finance is starting to become less clear, opening up new avenues for investment vehicles and capital markets.

But there are still obstacles in the way of widespread acceptance. As different jurisdictions adopt varying approaches to digital asset monitoring and compliance regimes, regulatory uncertainty remains a major concern.

While some regions, like Singapore and the European Union, have taken proactive measures to set clear regulatory norms, others are still figuring out where they stand. Businesses’ approaches to risk reduction, security procedures, and compliance will be influenced by these changing policies.

Businesses that successfully integrate tokenisation into their financial strategy will be positioned for long-term success in an increasingly digitised and decentralised global economy, even though adoption will move at varying rates across industries.

The institutional shift and CBDCs

Central Bank Digital Currencies (CBDCs) are still developing, but more slowly than first thought. Citing the need for legislative clarity, interoperability testing, and risk assessment, about one-third of central banks have postponed their intentions to introduce digital versions of their currencies.

Most, however, are still driven to keep control over monetary policy and currency issuance and are dedicated to eventual adoption. The increase in cross-border wholesale CBDC initiatives over the past few years is indicative of an institutional focus on improving interbank settlements and simplifying international financial flows.

The People’s Bank of China (PBOC), the European Central Bank (ECB), and the United States Federal Reserve are among the central banks that have started pilot programmes to test the infrastructure for digital currency transactions at the wholesale level. Project mBridge, which links banks in China, Thailand, the United Arab Emirates (UAE), Hong Kong, and Saudi Arabia, is one of them.

Wholesale CBDCs are emerging as a more attractive option for large-scale corporate transactions, liquidity management, and cross-border trade financing as central banks concentrate on improving interbank settlements and simplifying international financial flows.

Adoption of CBDCs has important and encouraging ramifications for businesses. Reduced transaction costs, quicker settlement times, and less dependence on middlemen are all advantages for businesses involved in international trade.

By facilitating quicker settlement times and lowering reliance on intermediary currencies, wholesale CBDCs have the potential to lower foreign exchange risks, especially in emerging markets where operational difficulties are caused by currency volatility. CBDCs could reduce the risks related to foreign exchange swings in cross-border payments by facilitating direct currency exchanges and improving transparency in cross-currency transactions.

Despite these benefits, privacy laws, their influence on monetary policy, and cybersecurity issues remain major barriers to widespread adoption. The digital currency frameworks of some jurisdictions, like China and the UAE, are developing quickly, but others are still cautious and are waiting for more precise guidelines regarding the governance of CBDCs and their integration with current financial systems.

Businesses must keep up with changing technology and regulatory environments as CBDCs continue to grow. Navigating the next stage of financial digitisation will require an understanding of how digital currencies fit into global payment infrastructure, liquidity management, and corporate finance. This emphasis on ongoing learning and adaptation highlights the significance of remaining informed and proactive in the rapidly changing fintech world.

Future of enterprise finance and AI

Artificial intelligence is evolving from a tool for efficiency to a fundamental component of enterprise finance, changing everything from sophisticated financial modelling to real-time risk management. As businesses scramble to incorporate automation and machine learning into financial operations, investments in AI-driven compliance, fraud detection, and predictive analytics are increasing.

The B2B banking industry has proven AI’s usefulness for automated risk assessment. It enables businesses to examine large financial data sets to identify irregularities and make previously unheard-of credit risk predictions.

Real-time transactional behaviour analysis by AI-driven fraud detection systems, which are already integrated into international payment networks, can reduce financial crime losses by up to 50% by flagging questionable activity.

Corporate finance is also changing as a result of the emergence of generative AI. Complex legal documents, contract analysis, and regulatory compliance reporting are now processed by AI-powered automation, which can reduce processing times by up to 90%.

Businesses now face additional security and regulatory problems as AI develops. Although AI improves financial decision-making, authorities are examining AI-driven financial services more closely, so companies must use understandable AI models to ensure compliance and transparency.

For financial organisations, investing in AI is now a strategic need rather than an option. In an increasingly automated and data-driven economy, businesses that do not incorporate AI-powered financial solutions run the danger of falling behind.

Fintech adoption for compliance

Regulatory compliance is still a major concern as financial technology changes business interactions. Businesses are being forced to reconsider how they handle compliance as a result of the growing complexity of international financial regulations, as well as the emergence of digital assets, AI-driven financial services, and CBDCs.

Regulatory technology (RegTech), which offers automated solutions for risk assessment, fraud prevention, and real-time monitoring, is becoming an increasingly important part of enterprise fintech plans.

Several important causes are driving the need for RegTech. Businesses that conduct cross-border operations must adhere to several regulatory frameworks, which raises the cost and difficulty of reporting. Businesses may automate compliance procedures with AI-powered RegTech solutions, guaranteeing adherence to changing jurisdictional standards while lowering operational risks.

As businesses enhance automation to manage regulatory complexity, the RegTech industry is expected to grow at a compound annual growth rate (CAGR) of 21.6% from its 2023 valuation of $11.7 billion to $83.8 billion by 2033, according to Allied Industry Research.

AI is already being used to expedite manufacturing, healthcare, and financial regulatory procedures. By automating risk assessments, fraud detection, and legal reporting, RegTech platforms powered by AI have been demonstrated to dramatically lower compliance costs. AI-based solutions have reduced document filing times in legal departments by 90%, improving operational effectiveness and reducing compliance expenses.

Initiatives for digital compliance are also being accelerated by governments and financial institutions, especially in light of the growth of digital currencies and decentralised finance (DeFi). Regulatory frameworks must change as blockchain-based transactions and CBDCs become more popular in order to adequately supervise these financial innovations.

Businesses that don’t incorporate automated compliance solutions run the danger of facing fines from the government, being investigated, and experiencing operational inefficiencies.

Businesses can lower compliance expenses, improve fraud detection capabilities, and increase the effectiveness of regulatory reporting by utilising RegTech. Integrating AI-powered compliance technologies enables businesses to manage changing regulations and reduce the dangers of financial crime.

Businesses that proactively deploy RegTech solutions will be better equipped to handle the increasingly complicated global regulatory environment as financial technology continues to evolve at a rapid pace.

In order to negotiate an increasingly complex legal environment, businesses must make sure that their infrastructure is ready for the integration of digital assets, engage in staff development to maximise AI applications, and have strict compliance procedures in place. Cybersecurity is still a major worry, and to protect digital transactions, firms must implement advanced risk mitigation techniques.

Despite the traditional lag in B2B financial technology adoption compared to consumer finance, 2025 represents a significant shift. Failure to integrate financial technology puts businesses at risk of operational inefficiencies and decreased competitiveness, especially as the sector transitions to full-scale digitisation. Moving from trial adoption to strategic deployment is now essential, making sure that technology investments solve particular operational issues and provide quantifiable corporate value.

Opportunities are being created by the quickening adoption of financial technology, but businesses that don’t make strategic plans may find it difficult to remain resilient in a setting that is changing quickly. Enterprise transactions in the future will be shaped by companies that adopt digital finance innovations now; those that do not run the risk of becoming permanently behind in a financial ecosystem that is changing quickly.

The post Fintech’s next revolution appeared first on International Finance.

There is also a lot of anticipation for the altcoin season when scores of other coins are expected to peak in value. Many revolutionary technologies in the decentralised currency, apps, and finance protocol ecosystems that are in development could radically alter the way we interact with each other.

Blockchain and subsequent technologies have been at their core working towards decentralisation and moving power away from behemoth financial institutions like central banks and toward common folks such as ourselves worldwide. The promise has always been an escape from a government-controlled environment to more democratic, peer-to-peer-regulated systems.

This hope of freedom remains strong in the cryptocurrency movement. However, there is pushback from governments around the world that aim to use blockchain technology to consolidate even more power by developing digital currencies (Central Bank Digital Currencies, or CBDC) issued by their respective central banks.

Blockchain is a double-edged sword that you can use to either decentralise and democratise or centralise and wield unlimited power, just as you can harness atomic energy to power megacities and annihilate human civilisations.

What is CBDC?

CBDCs are central bank-issued digital currencies that complement cash rather than replace it. In a CBDC world, the wallet holder can easily transfer each virtual currency unit’s digital code to other people’s digital wallets.

These digital currencies, unlike “traditional cryptocurrencies,” are not decentralised; central banks issue them instead of independent entities like Bitcoin. Theoretically, the value of CBDCs would be as stable as the fiat currency of the country issuing them, unlike other crypto assets that can experience significant fluctuations.

Furthermore, different countries are testing a variety of CBDC strategies. The Eastern Caribbean is implementing DCash, an account-based concept that is one kind of CBDC. Customers maintain direct deposit accounts with the central bank through DCash.

China’s e-CNY, a CBDC pilot programme, is at the other extreme of the spectrum. It is up to private-sector banks to provide and manage digital currency accounts for their clients. In 2022, China will present e-CNY at the Beijing Olympic Games. The money was usable for purchases made within the Olympic Village by athletes and visitors.

The European Central Bank is also considering a different model, in which authorised financial institutions run individual permissions nodes on the blockchain network to facilitate the issuance of virtual euros. To preserve user privacy, the last model, well-liked by “cryptophiles” but not thoroughly tested by central banks, distributes fiat currency, government-issued money unbacked by a commodity, as anonymous fungible tokens.

Some 87 countries, or more than 90% of the world’s GDP, are exploring the possibility of CBDCs. Let’s take a deeper look:

Launched in June 2022, the JAM-DEX from Jamaica is the first officially recognised CBDC as a legal tender. There are no sophisticated use cases (such as cross-border payment for smart contracts) and the offering is somewhat basic. Unlike the Bahamas’ Sand Dollar and the Eastern Caribbean Central Bank’s DCash, Jam-Dex is not based on blockchain technology.

Nigeria introduced eNaira in October 2021, becoming the first nation in Africa to implement a CBDC.

Africa’s Sub-Saharan region is about to embrace CBDCs. The extensive adoption of the mobile money transfer service M-PESA has created a robust financial and social framework for the possible future application of CBDCs.

The central banks of Saudi Arabia and the United Arab Emirates collaborated to create Project Aber. This project explored the use of a jointly issued digital currency as a tool for domestic and international payments between the two nations.

Why are governments pursuing CBDCs?

Some proponents of blockchain technology believe that new digital instruments, like CBDCs, may solve problems with efficiency, security, and accessibility that plague the current physical infrastructure and alternate cryptocurrency assets. Money is expensive to print and some cryptocurrencies, such as Ethereum, have exorbitant gas fees (transaction fees) that aren’t viable for day-to-day transactions. CBDC enthusiasts (mostly big tech and banks) believe centralised digital currencies are the answer.

Among the frequently cited benefits are:

Lower Operational Costs: Financial service providers can potentially reduce their yearly direct costs by $400 billion by allocating funds toward digital banking instead of physical infrastructure. However, we must weigh the lower costs against the substantial new technology investments that CBDCs would require.

Faster Transactions: The electronic payment systems in many nations could operate more quickly and effectively thanks to CBDCs. As we’ll see below, this argument is becoming less persuasive.

Improved Accessibility: The percentage of US adults without bank accounts is less than 5%, whereas the global unbanked population was 1.6 billion in 2016. Mobile-accessible CBDCs have the potential to improve financial inclusion. Additionally, mobile money gives digital financial service companies access to untapped areas. But adoption isn’t a given; a lot of underbanked individuals could prefer the complete secrecy that cash provides.

Increased Safety: Implementing a regulated digital currency accessible through mobile devices may improve payment security and lower the likelihood of fraud by guaranteeing a complete and irreversible transaction, even in the absence of a formal bank account. Users may be able to “sign” transactions digitally through the controlled use of private-key cryptography. This would boost the confidence of all stakeholders and expedite the transaction’s completion.

Interoperability: For those who are unaware, some argue that blockchain interoperability holds the key to resolving the disjointed and compartmentalised characteristics of blockchains. Without external intervention, blockchains cannot communicate with one another because they are trustless systems. Cross-chain solutions can be helpful. Cross-chain solutions facilitate the smooth transfer of data between blockchains. Users of defi protocols and dApps practically need to interact with cross-chain solutions, as many of the most significant and fascinating projects currently exist outside of platforms like the Ethereum L1 blockchain.

Currently, blockchain interoperability is fragmented and incompatible. Many rival interoperability efforts compete with one another to become the most successful, resulting in customised cross-chain products with differing levels of security and reputation that ultimately serve only to manipulate the blockchain environment. One of the biggest ironies of blockchain technology is that various cross-chain solutions are still incompatible with one another. Even worse, this incompatibility makes it more difficult for consumers, businesses, and authorities to evaluate the security of each choice, endangering the general acceptance of blockchain technology.

According to some, a common interoperability framework is the answer.

One project cannot be responsible for ensuring blockchain compatibility. There must be an industry-wide initiative. We need to come together and establish once and for all how we want to send, receive, and verify data from another blockchain rather than taking an “everyone for himself” approach.

Adopting a common framework for interoperability might jeopardise the viability of the economic models behind ongoing interoperability projects. Instead, it would merely serve as the framework for an extremely secure layer of basic infrastructure, atop which individual projects might construct products that incorporate various trade-offs specifically designed for certain use cases. This distinction is what matters.

CBDC utilisation and development

Many nations’ central banks have started research projects and pilot programmes to ascertain if a CBDC would be useful and viable in their respective economies.

The first nation to enact a CBDC was the Bahamas. It intended to improve financial inclusion for its 700 island-dwelling citizens, some of whom have restricted access to ATMs and banking services, so it introduced the Sand Dollar in 2020.

As of March 2024, the Bahamas, Jamaica, and Nigeria were the three nations with operational CBDCs. For technical reasons, the Eastern Caribbean Currency Union suspended its CBDC and launched a new trial programme.

Nineteen of the G20 have programmes under development, while 36 CBDC pilots are now in operation. A CBDC is being considered by the BRICS nations: Brazil, Russia, India, China, and South Africa.

The United Kingdom’s Britcoin, which was in existence from 2011 to 2019, is one instance of a CBDC endeavour that was unsuccessful.

The United States is one of the nations investigating whether a CBDC “might improve on an existing safe and efficient U.S. domestic payments system,” according to the Federal Reserve.

When it comes to the authoritarian use of technology, China is always ahead. It has outlawed private cryptocurrencies, but the nation has experimented with virtual money. The Central Bank of China (PBOC) has developed the most sophisticated market application of CBDC to date. Private-sector banks are required to distribute and manage these accounts for their clients under China’s CBDC e-CNY pilot programme.

In late 2019, PBOC began testing e-CNY for use in consumer lifestyle applications such as shopping, transit, government services, and wallet-based payments. After starting in four cities, the pilot programme swiftly spread to five more. By May 2022, the e-CNY pilot had processed 260 million transactions totalling over 83 billion yuan through 4.5 million merchant wallets.

Proponents claim China’s CBDC experiment revealed the following possible advantages. To use e-CNY, you do not need to have a bank account. Six approved state-owned banks offer digital wallets that customers without an account can download and use. CBDC, like blockchain-based cryptocurrencies, allows users to authenticate themselves with banks using personal digital fingerprints. By doing this, banks avoid doing business with unreliable parties, which may prevent them from becoming involved in fraud and other illegal actions like money laundering.

Banks may save money using CBDC to reduce transaction reporting and monitoring costs. At the same point of time, it could be feasible for e-CNY to simplify the allocation of subsidies, like employee transportation.

However, it is important to see how China’s social credit system and CBDC go hand in hand to have absolute control over the populace. With CBDC, the government can monitor each individual’s transactions in real-time, and it can even control spending limits and what one can buy with their money. Because of this, CBDCs are a source of fear for many in the tech and economic circles.

Battle for the soul

We are witnessing an epic struggle for the very spirit of the financial system, even though the fighting is mainly silent and hidden from the public eye. Central banks are considering replacing the bank-issued digital currency that consumers use daily with publicly issued digital currency. This could significantly alter and weaken the financial system’s stability.

Fear of losing in a growing arms race often drives government decisions. If another central bank introduces a more appealing form of exchange, no one wants to deal with falling demand for their currency or soaring withdrawals from their financial institutions. However, the rush to get ready for the economic equivalent of military mobilisation could create a highly unstable international order that undermines monetary authority.

The digital currency of central banks (CBDC) might be in several formats. Some versions might be harmless, but the most extreme, one that is widely accessible, elastically supplied, and interest-bearing, can cause unsettling changes in the financial system, erode the availability of credit, and jeopardise privacy.

The financial system that exists now is the result of several factors that came together over the last century. First, authorities obstruct the issuance of private paper money by combining harsh taxes with outright prohibitions. Governments grant licences to private intermediaries, typically commercial banks, so long as the liabilities issued by the latter are convertible into liabilities of the central bank on an equal footing. Last but not least, the private sector manages the retail payments system for the rest of us, while the central bank oversees the wholesale payments system for banks.

All of this indicates that almost everything that people consider to be money in our day and age is a commercial bank’s digital liability. For instance, demand and time deposits, which are digital entries on bank ledgers, make up 97% of the overall amount of M3, or 144% of GDP, in the United Kingdom, where the total quantity of M3 is 148% of GDP. In the euro region, 91% of M3 is digital. Furthermore, in China, 96% of broad money, which accounts for over 200% of GDP, is digital.

Most people are unaware of this, as Bank of England Deputy Governor Jon Cunliffe pointed out in a recent lecture. When they buy groceries, buy a new phone, or renew a software subscription, they are unaware that their bank is creating digital money for them. Crucially, we can depend on this system because the central bank provides the necessary framework.

Authorities genuinely pledge to turn specific bank liabilities into the means of exchange, the liquid, safe asset known as reserves, under as many different global conditions as they can to accomplish this. Experience tells us that under most global conditions, central banks dedicated to price stability are better able to accomplish this than private entities. We depend on this framework, in Cunliffe’s words, to “tether private money to the public money issued by the state.”

Central banks are moving forward, frequently citing goals like monetary policy execution, financial inclusion, and payment efficiency. Two more significant drivers are visible. First, there is a desire to stop the issuance of private monetary instruments like Libra (now Diem) and replace cryptocurrencies like Bitcoin. Governments, on the other hand, have extensive experience with these private currencies and can either apply harsh taxes or outright bans when they come to light. The second is FOMO or fear of missing out. Central bankers want to ensure that they can issue CBDC as soon as others do. This, in our opinion, leads to instability, since, theoretically, a sudden and unexpected incident can prompt several central banks to quickly mobilise their digital currencies to avoid falling behind.

This brings up some important information concerning CBDC. Before releasing retail digital currency, a central bank must decide on several design elements. Is this an instrument for anonymous bearers? Will a person’s holdings be subject to quantity restrictions? Is it only available to citizens of the issuing jurisdiction to hold? Will it also have 0% interest, like paper money?

We are aware of the solutions to these queries regarding paper money. It is an anonymous-bearer instrument. The supply is elastic enough to permit, in most cases, the limitless conversion of certain bank obligations at par into the medium of exchange. Everyone has the option of using paper money. It also has no interest.

The CBDC’s likely characteristics are also readily apparent. CBDC must maintain its anonymity to avoid promoting illicit activities. For CBDC to truly serve as a substitute for paper money, its distribution must be flexible. People may store an infinite amount; lacking such an opportunity, bank obligations may not convert into CBDC on an equal basis. Limiting citizens’ possessions is an example of capital controls that are foolish and unworkable. Lastly, we observe two justifications for CBDC’s need for interest. First, we believe that a central bank paying interest on commercial banks’ reserve deposits but not on individual deposits is politically untenable. Second, in its absence, authorities would be unable to reduce nominal interest rates below the effective lower bound.

Four major issues arise from inventing such a “universal” CBDC: disintermediation, currency replacement, lack of privacy, and the impossibility of guaranteeing compliance. On the first hand, financial strains would eventually force uninsured deposits to leave private banks for the central bank, even though inertia (along with interest rate rises and service enhancements) would keep money in the banking system for a while. Furthermore, these inflows will come from highly reputable central banks, based in rather stable political and financial environments. Imagine what would happen if the Fed gave universal, unlimited accounts, given the current high overseas demand for US paper money. The implications might be disastrous for emerging markets and developing economies.

Privacy and compliance are the last two linked difficulties that arise from CBDC’s non-anonymity. Everything we do on the first day becomes traceable. Although we do not support free banking or libertarianism, we do agree that there are significant risks associated with giving governments access to this kind of in-depth data on our daily activities. It is therefore difficult to understand why democratic nations would consent to such a concentration of power.

Moving on to compliance, someone will need to put in the effort to make sure CBDC users follow the law. These KYC and anti-money laundering initiatives are expensive. Nowadays, we outsource these responsibilities to commercial banks. In addition, banks offer a wide range of other services. Who will pay the price, and who will carry out this task?

The establishment of an intermediated CBDC is one method of addressing privacy and compliance concerns. Under this arrangement, banks or brokers manage individual accounts, protect customer privacy, oversee compliance, and aggregate balances into central bank accounts (which are likely to generate interest). Despite this strategy, the dangers of currency substitution or domestic disintermediation remain. Even so, money would continue to enter the central bank indirectly, through what are essentially narrow banks.

In light of this, it is easy to understand why the People’s Bank of China is developing a digital renminbi before other central banks. Even during a financial crisis, there is little chance of disintermediation because most of the big banks are state-owned. Strict capital controls currently impose significant restrictions on currency inflows. Expectations of personal privacy are already low. Last but not least, state-owned banks can readily finance access if the government so chooses.

Returning to the original query: In what areas is the current monetary system deficient? We respond that, independent of new digital currencies from central banks or private issuers, there is a great deal of room to enhance the payment system and increase financial accessibility.

Both the public and private sectors are already making efforts to offer retail payment systems that are more affordable, quicker, more dependable, and easier to use both domestically and internationally. The TIPS system, for instance, costs €0.002 per transaction and has a processing time of 10 seconds in the euro region. Furthermore, the US Federal Reserve plans to introduce FedNow in 2023; the UK has faster payments; and Canada is trying real-time rail (RTR). None of these initiatives advocate for CBDC.

In terms of financial accessibility, India’s example is useful. Launched in 2014, the Pradhan Mantri Jan Dhan Yojana (PMJDY) uses the nation’s universal biometric personal identity to save expenses and offer free basic bank accounts. Account balances average almost $50 for the approximately 420 million users brought into the system. Once more, subsidies were necessary for India’s success—not the issuance of CBDC.

All of this makes us worried. To be clear, we are ardent supporters of technologies that raise welfare and save costs. However, the most significant innovations, those that enhance credit availability and payment infrastructure, do not necessitate ubiquitous CBDC and its associated dangers. Why, then, are central banks working so hard to get ready? Why would someone make such a plan for contingencies?

We don’t see any simple ways to stop this unfavourable result. The cooperative equilibrium in which no one introduces CBDC is difficult to enforce, much like in a traditional prisoner’s dilemma. First, central banks cannot promise that they will never issue CBDC. Second, others now believe it is too late to oppose China’s move toward the CBDC; even though they are fully aware of the dangers, they feel obliged to prepare.

The best chance may be in the central banks, all moving extremely cautiously and working to “get the design right.” That, in our opinion, entails going considerably beyond universally available, elastically supplied, interest-bearing CBDC.

Taking everything into consideration, we conclude that issuing universally accessible, elastically supplied, interest-bearing CBDC is a foolish move on the part of central banks. On a domestic level, it might displace private middlemen by enticing authorities to direct credit through direct deposit inflows into the central bank. An elaborate collateral and haircut system would be required, which would significantly increase officials’ power over credit distribution even if the central bank were to re-circulate the funds to potential lenders through an auction process.

Worldwide, there might be a tidal wave of money moving from areas seen as less stable to those seen as safe, which would increase inequality and the power of the wealthy receivers. And lastly, privacy. Although this issue might be solvable, the fact that CBDC grants access to all of our activities would undoubtedly entice totalitarian regimes.

For now, Federal Reserve Chair Jerome Powell’s words are of some reassurance: “We would not want a world in which the government sees, in real-time, every money transfer that anyone makes with a CBDC.”

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