State and corporate digital currencies go for their market share

As bitcoin struggles to continue rising and crypto companies shut down or lay off staff, the threat from state-owned digital currencies and regulated stablecoins is growing.

The first month of 2023 was marked by a long-awaited rebound for cryptocurrency users, which occurred without any important events.. BTC was able to rise above $23,000, breaking the lines of a downtrend that lasted more than a year. Other cryptocurrencies also jumped in price. More than others, Ethereum add-ons, Polygon and Avalanche, as well as Aptos, another killer of Ethereum, Solana and Cardano, created by the former developers of the Diem digital currency at Facebook, have grown.

Against the backdrop of such optimism, ongoing bankruptcies have faded into the shadows – the consequences of the collapse of FTX. The biggest case that can turn into serious consequences for the entire market is the application for financial insolvency of the credit company Genesis Global, which is part of the Digital Currency Group (DCG) holding. This is one of Barry Silbert's companies that was engaged in issuing crypto-currency loans, including unsecured ones.. Unfortunately, she ran the business just as well as the infamous Alameda Research.

Bankruptcy of Genesis Global with debts of more than $5 billion is not only dangerous in itself. It threatens to undermine the reputation and financial health of Grayscale, the operator of the industry's largest investment trusts, GBTC and ETHE.. The liquidation of Grayscale funds can not only cut off the emerging growth, but also knock out the entire cryptocurrency market.

Genesis debts are several times less than the capitalization of Grayscale funds, and even more so the cost of their security. However, panic among investors could lead to a further sell-off of GBTC and ETHE shares, increasing already record discounts (over 40% for bitcoin and over 50% for ether). However, the provision of funds is not going anywhere, and Grayscale may well get by with the partial liquidation of underlying assets.. For example, about 30% of reserves in GBTC are enough to pay off Genesis debt at current prices, and even taking into account the inevitable fall in this case, this share is unlikely to exceed 50%.

Thus, from a market point of view, Grayscale and DCG have a good chance of survival.. But the force majeure factor can also intervene here.. Not a natural disaster, but an investigation by regulators. For a public company, this is little better than a tsunami.. As part of the FTX case, the US stock regulator (SEC) has already drawn attention to the general state of affairs in the DGC holding. So Genesis could be as disruptive to DCG as Alameda Research was to FTX.

Poor asset management at Genesis Global has already cost Barry Silbert's cryptocurrency empire dearly. Plugging the hole in Genesis with the successful Grayscale Investments, if not killing both companies, will discourage many investors from buying Grayscale shares, even at the current discount.. This means that capitalization will not go up after bitcoin and ether, and Grayscale's income will fall relative to the market.

Another multi-billion dollar bankruptcy at the current stage is extremely dangerous for the cryptocurrency industry. It will give governments reason to tighten control over any business related to cryptocurrencies, for the good purpose of protecting investors.. And it may even raise the question of limiting the free circulation of unregulated cryptocurrencies, especially since they are already growing up, albeit not so investment-attractive, but more reliable and obedient to the state, digital currencies of central banks, they are also CBDC or CBDC.

Creeping offensive of digital currencies of the Central Bank

Projects of digital currencies of central banks appeared in 2016. The community is already accustomed to them and does not see the growing danger, considering the mass introduction of the Central Bank of Central Banks to be a matter of the distant future.. Most cryptocurrency users do not consider government tokens a serious competitor due to their centralization and full control by the regulator (Central Bank). Allegedly, this will alienate people, and they will not use the state digital currency.

However, crypto-optimists are deeply mistaken and greatly exaggerate the importance of the “popular popularity” of the Central Bank's digital currency.. The use of the state currency within its jurisdiction is not a right at all, but an obligation. All settlements within the state take place in its currency, although certain types of contracts allow the use of foreign or alternative currencies with the consent of the parties. But no legally operating organization can refuse to accept payment in the national currency if the other party to the transaction requires it.

Over time, after passing all the stages of testing, these rules will begin to operate for the digital version of the ruble and the euro, the dollar and the yuan. That is, the digital currency of the Central Bank will be just as obligatory for acceptance by trade, government and other organizations as its current cash and non-cash forms.. Central Bank digital currencies will not lack a “customer base”. Even if the complete adaptation of the population and widespread distribution will take many years.

In the last months of 2022, many states are accelerating the development and implementation of their digital currencies. This trend is likely to continue into 2023.. In fact, the fact that the world's largest central banks have not yet launched their digital currencies can only be explained by inertia.

The financial sector is very actively introducing new technologies, but it is extremely conservative about any changes in monetary policy. And the leadership of the Central Bank and large private banks usually consists of people of the older generation, who for the most part do not understand cryptocurrencies and are afraid of them.. Therefore, even a controlled cryptocurrency is perceived as a risk factor for the economy.. They underestimate, among other things, the possibility of total control over the turnover of the state digital currency in real time.. However, sooner or later, and rather sooner, the obvious advantages of the digital currency of the Central Bank will outweigh the fears.

The next stumbling block in the introduction of digital currencies of the Central Bank will be scaling when using tokens by hundreds of millions of people. Even global payment systems do not experience such a load.. Central banks will have to build the technical infrastructure from scratch or shift the turnover to commercial banks, leaving themselves a controlling function.

The blockchain architecture itself, which requires a sequential linking of blocks through hashing and synchronization of many nodes, imposes serious restrictions on throughput.. None of the existing blockchains has yet proven in practice sufficient reliability for full-scale use in the financial system of a large country.

Central Banks Accelerate CBDC Development

Follow the events of the last months. One of the most active and consistent adherents of the deployment of the state cryptocurrency is the People's Bank of China. It is the Chinese Central Bank that is more interested than others in controlling the financial flows of its one and a half billion population.. At the same time, the level of penetration of smartphones and mobile applications among the urban population in China is one of the highest in the world.

The first stages of testing the digital yuan and distributing tokens in certain regions began a year ago, and now this stage is close to completion. The stage of work on bugs, technical improvement and debugging of the product before mass application begins. The latest updates show a significant increase in the functionality of the Chinese CBDC.

Recently, smart contracts have been launched on the blockchain of the digital yuan, which significantly expands its potential.. Now it is possible to make contactless payments from a mobile application. Also, one of the Chinese brokers made a purchase for digital yuan of securities on the stock exchange. And this opens the entire financial market of China to the new currency.

And, more importantly, the Chinese Central Bank is preparing for active expansion into the international market.. For this, the UDPN project is being developed – an analogue of SWIFT for digital currencies of the Central Bank and stablecoins. Legally, the project is based in Hong Kong and is developed by the team that created BSN, a Chinese platform for the interaction of public and private blockchains.. However, the program is funded and overseen by the Chinese government.

NBK has another advantage. The Chinese are very law-abiding, even compared to Western Europeans.. Soviet writer Ivan Yefremov called the socio-political model of China “ant socialism”. It is believed that the authority of the government for the ordinary Chinese is indisputable, and following the state policy is the basic line of behavior. Therefore, the low popularity of the digital yuan at the testing stage does not matter.

As soon as the digital yuan is officially declared legal tender, completely analogous to the traditional yuan, millions of people, especially young people, will immediately begin to use it. No promotional activities will be needed, the main requirement will be the technical reliability of the state blockchain platform. It is possible that it will be put into mass operation as early as this year.

Other central banks do not want to lag behind China. For the Russian Federation, in order to circumvent sanctions and direct mutual settlements between companies and counterparties without the use of the dollar and the euro, a payment system that is not controlled by Western regulators is vital. Therefore, the Central Bank of the Russian Federation is speeding up the project of using the digital ruble in international settlements, and then within the country.. The first reading of the bill on the digital ruble in the State Duma may take place in the last days of January. The only operator of the state cryptocurrency will be the Bank of Russia.

Probably, at first, the digital ruble will be used in transactions with foreign counterparties, and only after that it will become available to individuals, and the timing of the second stage cannot even be called approximately.. The current technical parameters of the state blockchain are unknown. Launched several years ago, the Ethereum PoW-based Masterchain platform is, of course, unsuitable for processing millions of transactions per day, which is inevitable in its retail application.

The Central Bank of the European Union, which had previously been rather passive about the digital euro project, also began to show activity. The final decision should be made in the fall of 2023, but now the likelihood of a positive outcome is much higher than a year ago. It is likely that the largest commercial banks in the eurozone will become the operators of the European digital currency, while the Central Bank will retain controlling functions. The circulation of the digital euro will inevitably be tightly regulated with the application of all KYC and AML procedures. While EU finance ministers are concerned about user privacy, providing information to regulators will not be subject to this confidentiality of settlements.. Most of the EU Central Banks do not plan to run ahead of the steam locomotive, and only the Bank of Spain is starting its own “wholesale digital currency” project.

Of the European Central Banks, only the Bank of England adhered to traditional values for a long time and until recently did not plan to develop a digital pound project.. However, the general trend forced to reconsider the position. The Bank of Japan also tried to postpone the creation of the digital yen indefinitely, but it also changed its mind.

What is happening suggests that almost all major economies are already preparing to transfer the financial system to digital rails. The compatibility of all these different-sized platforms will remain in question for a long time, since none of their potential operators has bothered to develop common CBDC standards. However, the SWIFT global payment system prudently tests a platform for connecting various state cryptocurrencies and, obviously, hopes to claim the position of a single global digital currency gateway. In addition, the New York Fed, with the support of the Bank for International Settlements (BIS), is developing a “digital forex” platform called Cedar to exchange central bank digital currencies and corporate stablecoins.

Experiments with digital currencies of the Central Bank in African, Asian and Latin American countries continue. Saudi Arabia announced research in the field of state digital currencies this week. Turkey's central bank promises to introduce digital lira project this year. Pakistan predicts launch of state cryptocurrency for 2025. Slowly but surely testing digital currency in Indonesia is moving forward. The central banks of Mexico and Georgia faced difficulties and postponed the development of the state token.

Banking and corporate tokens

Separately, we should consider the position of the largest central bank in the world – the US Federal Reserve System.. Talks about the digital dollar have been going on for many years, but the regulator itself has not started developing the project.. However, in the United States, many functions of public institutions have been transferred to private companies for a long time.. Even the Fed itself is not formally (but not actually) subordinate to the government.. Private armies, private prisons, private development of military and space technologies for the needs of the state are common practice.

The development of the state digital currency is proceeding along the same path.. It will be created and brought to the market by private banks, and the Fed, formally remaining on the sidelines, will have to gain full control over the system.. The project is already running. In November, a consortium of US and international banks backed by SWIFT and Mastercard began testing the digital dollar on a platform called RLN (Regulated Liability Network). Test results may become known in February.

Large commercial banks in different countries have also been testing the possibility of introducing their own tokens for many years.. They are usually issued in the form of stablecoins pegged to the national currency of the bank's main jurisdiction.. During the crypto winter of 2018-2019, and then the corona crisis, these projects were put on hold, but after an acute phase they returned to life. Even giants such as the American JP Morgan and the Japanese Mitsubishi UFJ were forced to take this path.. However, against the backdrop of the development of state digital currencies, banking tokens will not be able to compete with them and will remain niche instruments.

Beginning of direct competition

It is obvious that the activity of central banks, which has covered almost the entire globe, will not go unnoticed. The Central Bank is the future of public money behind digital currencies. They are too convenient for any government to give up the benefits of complete control over all citizens' finances due to technical or social difficulties.. State digital currencies have most of the advantages of classic cryptocurrencies, except for two – decentralization and limited predictable emission. But, as practice shows even in the cryptocurrency industry, most users are ready to sacrifice independence for the sake of convenience and reliability.. And limited emission is good for an investment instrument, but not a means of payment. It generates price fluctuations and makes Bitcoin and its followers attractive for long-term holding.

Therefore, the coming years will be a decisive stage in direct competition between state and independent cryptocurrencies.. The market for international payments, both private and corporate, and public, is waiting for another redistribution. The digital currencies of the Central Bank are too serious a tool, and each of them will take its share, within the country or in an attempt to become the new standard for international payments.

Depending on how decisive the global financial regulators are, the struggle can become sharp, with the collapse of projects and high-profile processes, or passive, where the invisible hand of the market will decide everything for the public space.. But who owns this hand is well known.

The first victims of the deployment of digital currencies by the Central Bank of leading economies will be projects like Ripple and Stellar. Indeed, why do banks and other large payers need a centralized token with a volatile price, if there is a reliable government alternative based on the same technology and with the same transfer delivery speed? Regulated stablecoins not used in DeFi will also suffer.

I wonder if Changpeng Zhao changed his naive opinion that public and state cryptocurrencies do not compete and do not threaten each other? It was made on the eve of the collapse of FTX. Could the owner of the almighty Binance, who destroyed a competitor with one tweet, assume that he would become the next potential victim, but for more serious people?

Bitcoin and other cryptocurrencies on similar principles really intersect with state ones only in terms of functions, so direct competition is possible only in the field of international transfers. Otherwise, public cryptocurrencies move to the rank of savings and speculative instruments. Nevertheless, the Central Bank and governments will still strive to limit and control the turnover, since an independent monetary system still creates serious inconvenience for them. The main trend here will be the establishment of control over the largest cryptocurrency platforms and the maximum suppression of those who will avoid such control.

Corporate stablecoins are rather a niche solution used in the turnover of large international companies for settlements with counterparties and in customer incentive programs. They will not be able to compete with state-owned cryptocurrencies as a means of payment and are likely to become a new generation of loyalty programs.