Australia gears up for state-backed digital currency trials

From the Editor’s Desk

Dear Reader,

When it comes to forecasting, some predictions are more reliable than others, and just shy of nine months ago, when Forkast increased our coverage and then forecast that this year could see breakthroughs in central bank digital currencies, we were on reasonably solid ground. And 2022 has indeed shaped up as a year in which significant developments have taken place in the CBDC space.

Just this week, Australia became the latest country to announce trials of state-backed digital money, joining more than 100 nations looking into the development of digital fiat currencies — an arena in which the United States has distinguished itself by the size of the gap between it and China, home of what is now the world’s most advanced CBDC for a major economy.

The progress Beijing has made with its digital money — e-CNY — has certainly been impressive, but, like so many things in China, it comes at a potential cost to personal liberty that appears to be a core part of the reason for the U.S.’s apparent hesitation to develop a digital dollar.

Just this month, the U.S. Office of Science and Technology Policy issued a paper in response to President Joe Biden’s March executive order on regulating digital assets, which made clear some of the trade-offs between government control of a digital dollar and personal privacy.

China’s e-CNY addresses such concerns only superficially, prioritizing fairly clearly the issues of anti-money laundering and control of capital movements by stepping up scrutiny of e-CNY wallets and transactions according to their size (a focus touted by Chinese law enforcement in recent days as a self-evident success with the busting of an alleged US$28 million money-laundering operation). 

As it develops its own CBDC, the U.S. — and the governments of other nations that profess to value the privacy of their citizens — must necessarily pay more attention to the liberty side of the ledger than the administrators of China’s command-and-control economic model.

Although CBDCs are a broadly welcome and, some might say, an inevitable outgrowth of the revolution in finance that crypto has ushered in, their development poses questions relating to some of our most fundamental values.

Predicting how a balance will eventually be struck on those questions is rather more complex than being able to say with confidence, as we were back in January, that CBDCs would be a big deal in 2022.

So many predictions as we cover the increasing tempo of developments in Web3. And I invite you to join us at our next Crypto Rising live event, where we will explore the role of the regulator as the U.S. increases enforcement actions with Tornado Cash and now, a DAO — whose coders and voting members could potentially be held criminally responsible for how the technology is used by others. These are unpredictable times, but this is why we at Forkast understand the importance of discourse and discovery. 

Until the next time,

Angie Lau,
Founder and Editor-in-Chief
Forkast

Forkast.Insights | What does it mean?

The rise of CBDCs — or at least at this stage, pilot projects designed to test their feasibility — is part of a broader cultural shift among central banks around the world.

As cryptocurrencies are refusing to disappear, despite the best hopes of some of their critics, central bankers are exploring new ways of retaining control of money supplies. This is happening across two broad fronts: as a bulwark against capital flight, and as a response to the geopolitical agenda China is seeking to advance with its own CBDC. 

Countries with poorly performing national currencies, such as Russia, Lebanon, Turkey and Brazil, have seen many of their people convert cash into crypto as a way of preventing inflation from wiping out their savings. Thanks to crypto’s decentralized nature, bankers have little control over where that money goes or what it is used for. 

State-backed digital currencies could be used as a bridge between cash and crypto, giving governments more control over money, and all four of the countries above are currently either developing or trialing their own CBDCs. 

The second reason governments are looking to field their own digital currencies is China’s e-CNY — which is increasingly regarded as a threat to national security as well as a direct challenge to the U.S. dollar’s primacy as the world’s top reserve currency.

Australia has been involved in a number of long-running disagreements with China that span everything from human rights in Hong Kong and Xinjiang to trade wars over beef to Beijing’s increasingly aggressive military actions across the Asia-Pacific region. In its move to keep on top of Beijing’s digital currency strategy, Canberra is late to the CBDC party, but it may be better late than never.

Forkast.Insights | What does it mean?

As the British pound takes a beating amid one of the most controversial economic policy initiatives in the U.K.’s modern history, Bitcoin is also treading water. 

There is little evidence that movements in the British sterling’s value have much correlation with Bitcoin prices, but the value of the world’s biggest cryptocurrency does have a relationship with how the U.S. dollar performs, and the greenback has been on a tear recently. 

The U.S. Dollar Index, a measure of the strength of the dollar against a basket of other currencies, has surged nearly 20% this year. Bitcoin, meanwhile, has lost about 60% of its value and has dragged most of the rest of the crypto market down with it. That makes Bitcoin a hard sell. 

Institutional investors are more than happy to put money into the world’s most stable and liquid store of value rather than Bitcoin, and British investors appear to have joined them. While the world’s reserve currency gains value, holders of the British sterling and Bitcoin alike will have little to celebrate. 

Forkast.Insights | What does it mean?

Privacy is a growing point of concern when it comes to CBDCs. The digital currency developed by the Chinese government, whose record on human rights and civil liberties doesn’t mesh well with the autonomy and anonymity promised by new forms of money, has many people worried.

Mu Changchun, director-general of the People’s Bank of China’s Digital Currency Research Institute, wrote in an article published last week in Modern Bankers magazine that the central bank had designed four types of e-CNY wallets in line with the principle of “anonymity for small value and traceability for large value.”

“Freedom without control is not real freedom,” Mu wrote.

Even though China’s central bank promises “anonymity” for certain wallets that would allow users to register with only a mobile number, authorities are still able to easily trace e-money flows and identify individual e-CNY users, Turrin told Forkast.

The latest arrest is a vivid demonstration of the digital yuan’s traceability and transparency to Chinese authorities. Still, the risks don’t seem to be deterring criminals from trying to launder the new digital currency. Since last year, scams and money laundering cases involving e-CNY have emerged across China, with police reportedly investigating e-CNY flows to crack cases in Inner Mongolia, Jiangsu and Henan.

Central bank officials have repeatedly said digital yuan transactions offer more anonymity than traditional payment services such as credit cards, and that authorities would not have access to e-CNY transaction data unless criminal wrongdoing is involved. But given China’s questionable due process practices, privacy concerns over the digital yuan will likely only intensify.