A Deutsche Bank report has warned that central bank digital currencies (CBDCs) will replace cash in the long run—and unless the U.S. and Europe step up their game, they could be forced to rely on digital assets rolled out by the likes of Sweden and China.
“It is imperative that the U.S. and Europe catch up… development in both is too slow,” said the report, which focused on how to rebuild the economy after COVID-19.
According to the German financial giant, payment processors such as Visa and Mastercard have gained the most from America’s indecision on whether to develop a CBDC—as both companies “wield significant power to set prices, which is not great news for retailers or consumers.”
China 1, USA 0
The authors also concluded that Beijing’s advantage over Washington extends far beyond its head start in creating the digital yuan.
In a case study comparing Apple Pay with Alipay, Deutsche Bank said the U.S. tech giant had made rookie mistakes which have resulted in much lower levels of adoption than its Chinese counterpart. Somewhat surprisingly, statistics show that just 9% of U.S. consumers have adopted Apple Pay in their day-to-day spending, compared with 81% of Chinese shoppers who use Alipay.
Deutsche Bank said the iPhone manufacturer had missed a trick by failing to create value for all parties and monetize its ecosystem.
“Apple Pay has focused solely on consumers even though switching from cards to smartphone payments offers only marginal benefits. Banks and merchants have had little incentive to adopt the technology,” the authors wrote.
Other errors include relying on NFC technology (otherwise known as contactless payments,) even though just 10% of point-of-sale terminals are able to accept such transactions. By contrast, Alipay uses QR codes that only require a camera and an internet connection.
All of this could help American businesses, and banking officials, learn hard lessons about what works—and what doesn’t—when encouraging consumers to try alternatives to cash.
COVID catalyzes CBDCs
It’s quite interesting to see how Deutsche Bank is effectively calling for public and private institutions to work together on developing payment alternatives that would render credit card companies useless—removing middlemen fees that make transactions more expensive for shoppers, and eat into profit margins for merchants.
Another theme in the report centered on how a population’s mentality can have a big impact on how a CBDC should be designed. The authors wrote:
“As governments go about accelerating digital currency initiatives, they must be cognizant of cultural factors related to convenience, usage, and privacy. These will influence adoption rates. For example, the digital renminbi in China will allow regulatory authorities to see and trace every transaction.”
Research commissioned for the report revealed that the age-old battle of privacy versus convenience varies from nation to nation—with some nations prioritizing one more than the other.
Just 10% of Chinese respondents to its poll were concerned about anonymity and traceability when it came to CBDCs, as opposed to 22% of Americans, 21% of Britons, and 42% of Germans.
“Our survey showed that citizens in advanced economies are far more worried about privacy than people in emerging economies,” the report added.
Even though many Western central banks may not wholeheartedly agree with China’s tactics, Deutsche Bank says these institutions still have lessons to learn from the world’s second-largest economy: “Even if other countries do not want to go down some avenues of the Chinese route, they can learn from other factors, such as a higher penetration of mobile payments and younger demographics, as these will also act as catalysts for the advance of CBDCs.”
A long wait yet
As reported by Modern Consensus, we may only see CBDCs launch in the U.S. and Europe much later in the 2020s.
In August, Federal Reserve Governor Lael Brainard said America is actively looking into the technology that underpins central bank digital currencies, but warned that a digital dollar won’t happen overnight. Last month, the European Central Bank launched a public consultation to canvass the continent’s views on CBDCs—but as Deutsche Bank notes, the ECB is not even set to decide whether it will launch a digital euro until the middle of 2021 at the earliest.
This report isn’t the only one to warn the institutions that issue the world’s two most-traded fiat currencies that time is running out. In September, the German think tank dGen said that the euro will be overtaken by the digital yuan unless the continent manages to launch its own CBDC within the next five years.
Meantime, trials involving the digital yuan continue to gather steam. On Nov. 2, a governor of the People’s Bank of China said that initial tests of the CBDC have been a huge success.
And in an admission that could buy the West a little time, Yi Gang said its launch is not imminent, adding: “For a long time I see that we would have cash and digital currency coexisting in the future.”