Unbeknown to Most, A Financial Revolution Is Coming That Threatens to Change Everything (And Probably Not for the Better)

by Nick Corbishley, Naked Capitalism:

Given how much is at stake, this financial revolution is among the most important questions today’s societies could possibly grapple with. It should be under discussion in every parliament of every land, and every dinner table in every country in the world.

Around 90 central banks are either in the process of experimenting with or are already piloting central bank digital currencies (CBDCs). In a world of just over 190 countries that is a large contingent, but given they include the European Central Bank (ECB) which alone represents 19 Euro Area economies, the actual number of economies involved is well over 100. They include all G20 economies and together represent more than 90% of global GDP.

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Three CBDCs have already gone fully live in the past two years: the so-called DCash in the Eastern Caribbean, the Sand Dollar in the Bahamas and the eNaira in Nigeria. The International Monetary Fund, the world’s most powerful supranational financial institution, has been lending its expertise in the roll out of CBDCs. In a recent speech the Fund’s President Kristalina Georgieva lauded the potential benefits (on which more later) of CBDCs while heaping praise on the “ingenuity” of the central banks busily trying to conjure them into existence.

Also firmly on board is the world’s largest asset manager, BlackRock, which helps many of the world’s largest central banks, including the Federal Reserve and the ECB, manage their assets while obviously keeping all potential conflicts of interests at bay. The fund was the largest beneficiary of the Federal Reserve’s bailout of exchange-traded funds during the market rout of Spring 2020.

In his latest letter to investors, the CEO of BlackRock, Larry Fink, said the Ukrainian conflict has the potential to accelerate the development of digital currencies across the world.

“The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades As a result, a large-scale reorientation of supply chains will inherently be inflationary…

“The war will prompt countries to re-evaluate their currency dependencies. Even before the war, several governments were looking to play a more active role in digital currencies and define the regulatory frameworks under which they operate…

A global digital payment system, thoughtfully designed, can enhance the settlement of international transactions while reducing the risk of money laundering and corruption. Digital currencies can also help bring down costs of cross-border payments, for example when expatriate workers send earnings back to their families.”

On Tuesday (March 22), the Bank for International Settlements published the findings of a study it had conducted with four central banks — the Reserve Bank of Australia, Bank Negara Malaysia, the Monetary Authority of Singapore, and the South African Reserve Bank — into the practical challenges of executing cross-border payments between different central bank digital currencies. The report concludes that while major hurdles still remain, financial institutions could use CBDCs issued by participating central banks to transact directly with each other on a shared platform:

The Bank for International Settlements (BIS) Innovation Hub, the Reserve Bank of Australia, Bank Negara Malaysia, the Monetary Authority of Singapore, and the South African Reserve Bank today announced the completion of prototypes for a common platform enabling international settlements using multiple central bank digital currencies (mCBDCs).

Led by the Innovation Hub’s Singapore Centre, Project Dunbar proved that financial institutions could use CBDCs issued by participating central banks to transact directly with each other on a shared platform. This has the potential to reduce reliance on intermediaries and, correspondingly, the costs and time taken to process cross-border transactions.

The project was organised along three workstreams: one focusing on high-level functional requirements and design, and two concurrent technical streams that developed prototypes on different technological platforms (Corda and Partior).

The project identified three critical questions: which entities should be allowed to hold and transact with CBDCs issued on the platform? How could the flow of cross-border payments be simplified while respecting regulatory differences across jurisdictions? What governance arrangements could give countries sufficient comfort to share critical national infrastructure such as a payments system?

The project proposed practical solutions for addressing these issues, which were validated through the development of prototypes that demonstrated the technical viability of shared multi-CBDC platforms for international settlements.

The findings of the experimental CBDC program could assist in the adoption of CBDC international settlement for G-20 nations, though given the rising geopolitical fissures in the so-called “international rules based order”, it is far from clear which countries would be willing to engage with one another in such a way.

China has already launched its own digital yuan and is piloting its use in more than a dozen cities and regions. It has also been experimenting with its cross-border functionality. This has ignited fears in the West that that U.S. “financial leadership” is under threat — fears that have been magnified by the way US and EU sanctions against Russia, particularly the confiscation of a large chunk of Russia’s foreign currency reserves have backfired, encouraging not just Russia but many countries on the planet to seek out an alternative cross-border payments system.

At the same time, the U.S. is determined to continue playing a leading role in the new global financial architecture. To that end, it has cobbled together a tentative consortium of “seven of the largest Western-aligned central banks, led in practice by the U.S. Federal Reserve and the European Central Bank… aimed at creating a system of ‘interoperable’ CBDCs,” reports Washington DC-based blogger and analyst NS Lyons in the article, Just Say No to CBDCs.

But what are CBDCs? How will they work? What purposes could they serve? How might they affect the general populations of the countries where they are introduced? To answer the first two questions, here’s an excerpt from “Just Say No to CBDCs“:

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