Unlike the neolithic payments systems of the U.S., the European Union and India have shown that instant and free domestic payment systems like SEPA and UPI can be made to work well with existing technologies and frameworks. However, point-of-sale experiences remain firmly stuck in plastic and interchange fees and cross border payments remain a profound embarrassment for the entire global financial system.
In Europe, we have tried to solve these problems by creating a rule, committee or think tank. Initiatives such as the EU-wide Payments System Directive 2 have been delayed or thwarted by legacy institutions often on account of somewhat valid cybersecurity and fraud related concerns.
In the middle of all this analysis-paralysis, there’s stiff competition for innovation. While the West tries to regulate, the East continues to innovate. On their own, bitcoin and cryptocurrencies may not have been enough of a wake-up call for Western regulators. But China’s central bank digital currency, i.e., the DCEP (or Digital Currency and Electronic Payments) system has forced the issue on digital money. U.S. and European regulators recognize that if the future of money is Chinese, then China will be the power that dominates trade and military power.
China’s DCEP is a particularly interesting case because earlier this year U.S. sanctions practically debilitated Huawei. As a result, China recognizes it can no longer rely on an international system of money controlled by the U.S. or a domestic system of money controlled by Tencent and Ant Financial. Where does that leave a political system where the government is supposed to control everything? If it doesn’t control the money, it doesn’t control the payments, it does not have access to transactions. China’s DCEP is not an experiment; it’s imperative.
Now that the China fintech FOMO trumps crypto FUD, regulators are taking a very different approach to crypto. The regulators are saying, “Look, if this thing is going to happen anyways, then we might as well bring it into a banking framework and regulation as opposed to saying, let’s keep this crypto thing out into an unregulated sector of money.” This is why the Bank of England’s Deputy Governor Jon Cunliffe recently pronounced that “it is not the job of the regulators to protect banks against digital currencies.” He will ultimately prove to be the first of the many to say central bankers that out loud.