Law Decoded: Bank payments going global with stablecoins and CBDCs, Jan. 15–22

Editor's note

It may be too late for resolutions and too early for Lent, but lacking any discrete occasion, I would still like to give up United States political news for a while, or at least for the duration of one Law Decoded. 

Fortunately, in the spirit of going international and leaving the bonkers election cycle of the U.S., blockchain technology and stablecoins are playing a major role in the latest developments in cross-border payments and settlements. It’s long been one of the most talked-about applications of blockchain technology.

Diplomatic scheming shows up in payments by regular folks in the form of higher fees between countries in conflict. However, the issues of how money crosses borders through traditional alleys are so deeply ingrained as to be invisible to the average end user. This happens because while national payments systems have gotten streamlined with new technologies, they largely involve major commercial banks dependent on networks and systems set up by their respective central banks. Between central banks, many of these systems are stitched together clumsily.

The rise of stablecoins has inspired many major banks, otherwise turned off by the volatility of crypto assets, to reconsider these systems. JPM Coin may well be the most famous — until the central banks came along, of course.

This week has seen major news in stablecoins from commercial and central banks as well as the financial sinew connecting them. Unfortunately for the average user, these will remain the most permissioned of permissioned blockchains for the foreseeable future. Retail central bank digital currencies, however, are also moving forward.

Russia readies for Sberbucks

The largest retail bank in Russia, Sberbank is planning to launch its native Sbercoin by this spring.

Details on Sbercoin remain limited. In many ways, it looks similar to JPM Coin, aiming to streamline payment rails for Sberbank’s large corporate clients. Eventually, it could be part of its interactions with the Central Bank of Russia.

Originating with an order from Nikolai I, Sberbank remains ultimately under the ownership of the Russian government, with the Finance Ministry buying a controlling share from the Central Bank of Russia. Sberbank’s leader, Herman Gref, joined the bank from the Economic Ministry. The bank, consequently, enjoys a privileged relationship with the Central Bank of Russia.

With Russia’s new law “On Digital Financial Assets” coming into effect with the new year, the country has set the stage for a major push in the development of its blockchain industry. Per long-standing tradition, expect that development to be largely top-down, as it is here.

BIS means business when it comes to wholesale CBDCs

The Bank for International Settlements’ network of labs has put CBDCs at the top of its agenda for 2021.

Per the BIS’s charter to facilitate functioning between central banks, its focus is particularly on wholesale CBDCs. Exciting, however, are its plans for pilots that would have those CBDCs used on new platforms to settle payments between central banks and their respective currencies instantaneously. Moreover, they are working on mechanisms to distribute retail CBDCs, though those seem bound to depend on commercial banks and maybe even entirely private stablecoins that are just backed by different CBDCs.

BIS’s innovation hubs are themselves a relatively new initiative, launching at the end of 2019 in Switzerland, Singapore and Hong Kong. Also in the works for this year is the expansion of new hubs globally. Linked with economies and banking authorities that are themselves famously international, these hubs may reflect some of the locations for the first interoperable CBDCs.

The curious case of China

China’s efforts to internationalize its currency predate any talk of CBDCs by years. While China weathered 2020 much better than most major economies, yuan usage abroad has hit many roadblocks. Its CBDC, however, is charging ahead domestically and is already in the hands (or cellphones) of many citizens.

The future of the digital yuan remains uncertain. Domestically, how much traction is it getting? How quickly will it spread across the whole Chinese economy? And critical for China’s international ambitions, when will it leave the mainland?

Streamlining domestic payments is all well and good and will certainly leave the Chinese government freer to get the home-grown tech industry in line. But there is little doubt that long-term aims include circumventing existing (largely Western) systems of international payments. But with a Joe Biden administration looking to maintain much of Donald Trump’s hostility toward China while being more capable of getting allies like the European Union on board, is digitization going to be enough to break out abroad? And if so, when?

Further reads

Writing for Vox, Aja Romano argues that deplatforming is not a freedom of speech violation.

Attorneys for Sheppard Mullin Richter & Hampton write on competition concerns in blockchain uses, especially under new EU law.

Karen Yeung of the South China Morning Post talks the digital yuan’s first use in exchange between mainland China and Hong Kong.