China’s digital currency can become a threat to the US dollar. Should the Fed build its own?

From his office overlooking the Schuylkill River, Paul Melchiorre ponders what new billion-dollar tech giants might emerge from this economic downturn.

The one-time SAP manager who made the bulk of his fortune building software developers iPipeline and Anaplan, Melchiorre has placed his earnings among a string of tech funds, including LLR, NewSpring, Osage, and Stripes, all firms with local ties, and others. Has spread

Can a Recession Spawn Big, New, Profitable Companies? Melchiorre cites the past phoenix: Salesforce rose from the 2001 dot-com collapse and Uber in the midst of the Great Recession.

In the COVID-19 pandemic shutdown, he said, “tech companies hired like crazy,” backed by investors eager to capitalize on delivery systems and work-from-home start-ups. But the cycle turned faster than expected: “Now they’re making cuts. It’s about profitability again,” Melchiorre said. “Watch the news, and you’ll get depressed.”

Yet he still sees new wells of prosperity amid the gloom: data analytics, cyber security, artificial intelligence.

And, following the wreckage of the cryptocurrency bubble, he sees opportunities based on central bank digital currencies (CBDCs) – electronic money based not on some vendor’s futuristic pitch for private money electronic “tokens”, but on the national currencies familiar today. is based. Central banks and powerful governments.

Central banks are studying CBDCs amid a high-stakes struggle between the US, China and their allies and trading partners over whose money should serve as the world’s preferred currency.

How does electronic money work?

Melchiorre, with his investments in East Coast Tech Funds and Shore Cannabis Ventures, has a stake in that question: He is an investor and chairman of R3, a technology start-up that builds systems for use by digital currencies, With offices in New York and London.

Isn’t our money mostly electronic already? Since the 1960s, a complex network of online payment systems has developed to serve consumers and companies. Credit, Debit and ATM cards; automatic bill payment; computer-transmitted letters of credit; And other familiar services take our money, each with a cut from your bank or merchant.

Proponents of CBDCs say an apparently digital Federal Reserve dollar, operating under careful regulations on a secure, high-speed network, could cut fees charged by banks and other intermediaries. It can take a lot of the pain and insecurity out of distant transactions by setting programmable terms for making payments in compliance with the laws of each country.

Ron DeSantis and others fear this could give central bankers new access to personal and business spending records. If the Fed not only issues money, but also controls a system to track every electronic move, does it allow central banks to control people by denying them access to digital currency, for example, for political reasons? Will not give the power to do so?

Or will that power not be a new thing? Today’s payment systems “already expose a great deal of user data to their operators and authorities,” said David Rutter, chief executive of R3.

R3 has developed a “distributed-ledger” digital system that updates records as payments are made – not publicly to all users like “blockchain” ledgers, which are based on cryptocurrencies, but to secure transaction participants. In between, including regulators as required. R3 claims 400 financial-institution users, including government. Melchiorre is the company’s board chairman.

According to Rutter, a digital central bank currency could co-exist with old-fashioned cash, even as it replaced more cumbersome electronic systems; It could be designed with “cash-like privacy features”.

Competing with China’s Digital Yuan

Why now? I asked Melchiorre. “China has a digital yuan,” and it is using it to bully many of its trading partners into abandoning the dollar, which threatens to undermine US financial power and raise the cost of imports.

This “e-CNY” (CNY is the trading symbol for China’s currency, the yuan) was introduced to the world at last year’s Beijing Olympics and has rapidly added billions to online payments, despite concerns the government is on track. uses the system to do so and threaten its own citizens and businesses.

Without more efficient rival systems from the US or other developed countries, Melchiorre said, China could “force its trading partners into their own digital payment systems,” replacing the US dollar and costing Americans the benefits resulting from the dollar’s popularity. Can threaten benefits. Being the dominant currency for international trade increases the value of the dollar, making imports cheaper for Americans. It also makes it easier for the US to enforce multinational sanctions against Russia, Iran and other countries whose warlike actions the US seeks to punish.

The pressure from China has led the US-aligned countries to study whether or not to develop their own digital currency strengths.

In April, the United Arab Emirates, a US ally and oil supplier in the Middle East, announced that it had agreed to use R3’s system to help develop a “state-of-the-art CBDC infrastructure” that would “boost the UAE economy”. will digitally transform” and make the country more of a “global financial hub”, said Talal Al Qassi, head of UAE-based company G42, which is partnering with the central bank for its digital- Working on currency project.

Rutter said a growing number of banks around the world are adopting the technology to make cross-border payments less “painful and risky”.

“The more central banks adopt[digital currencies]the more likely it is for money to move across borders in a more direct and efficient way,” cutting costs and opening up businesses to more investment and more customers, he added. Said.

“Even though it is still in pilot, e-CNY has considerable reach and transaction frequency,” he said, citing reports that users transacted more than $10 billion last year.

In other countries, it has been slower. Rutter said the “sand dollar” issued by the Bahamas, which has worked to position itself as a haven for cryptocurrency and electronic money enthusiasts, accounted for 1% of that country’s transactions in its first year. attracted less than

He said Nigeria’s e-naira suffered from a “lack of demand and public awareness”, resulting in the central bank in the most populous African country forcing people to accept it instead of cash or checks for large withdrawals. Forced.

But “digital currency is coming,” Melchiorre concluded, around the world. “I hope we can get our (act) together for a dollar before it’s too late.”

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