Mastercard Sees the Central Bank Digital Currency (CBDC) Future That is Coming

By John Banks

The Bank of International Settlements, or BIS for short, is known as the central bank for other central banks. In January 2020, the BIS published a new research paper — not its first one — on central bank digital currencies (CBDCs).

Eight months ago, the BIS found that 80% of all the central banks they surveyed were investigating CBDCs, and 40% had moved from the research stage to the concept and design stage.

Meanwhile the U.S. Federal Reserve and European Central Bank (ECB) have expressed interest in digital currency and research, and the People’s Bank of China (PBOC) is potentially years ahead of the competition in rolling out an e-yuan, with mass trials underway involving real-world commercial use.

It is often hard to tell how serious an experimental technology actually is, or how close it is to creating real change. There is a wide gap between purely theoretical concepts (the stuff of science fiction) and hard-edged application (stuff that shows up at your doorstep, or on your smartphone).

That made it intriguing to see a Sept. 9 press release from Mastercard (MA), the payments processing giant, titled: “Mastercard Launches Central Bank Digital Currencies (CBDCs) Testing Platform, Enabling Central Banks to Assess and Explore National Digital Currencies.”

“With the global economy racing to embrace digital payments,” Mastercard opines, “central banks are also looking to the future and investigating how to support innovation while maintaining monetary policy and financial stability as they issue and distribute a currency.”

Mastercard, a payment processing juggernaut, wants a piece of CBDC action because the scale is huge, and the transactions are guaranteed.

One can imagine central banks like the Fed or ECB using a form of digital currency to directly distribute payments to tens of millions, or even hundreds of millions, of citizens at a time. (China is already doing something like this, on a trial basis and with small amounts of digital currency, for millions of workers.)

Further imagine these payments bypassing SWIFT (Society for Worldwide Interbank Financial Telecommunication), the international system for wiring money, and traditional bank account routing mechanisms, and all manner of other third-party intermediaries, to simply show up in citizens’ wallets.

For Mastercard, Visa (V), and the like, helping to build and maintain these payment rails could become one of the biggest lines of business since credit card transactions — and on a far larger scale, in currency volume terms, because CBDCs could be used to pay taxes and fund government programs.

Mastercard’s CBDC testing platform is meant to be a simulated environment, allowing a central bank to test the behavior of a CBDC as it moves through a virtual financial ecosystem. A real-world CBDC will have to make its way from commercial accounts to consumer wallets and back again, while enabling a wide array of transactions.

The Mastercard platform is designed to help the central bank test all that, before unleashing an experimental currency in a real-world setting.

In some ways, CBDCs are an economic version of the old space race between the USSR and the United States. In this metaphor, China’s e-yuan is comparable to the Soviet Union’s Sputnik 1, the world’s first functional man-made satellite.

CBDCs have created a space-race mentality because of the potential leverage inherent in the technology.

A country with a widely distributed, highly efficient and technologically versatile CBDC will, at least in theory, have fine-grained control over its economic policy, enabling possibilities that never existed before.

Imagine stimulus funds appearing instantly in a region struck by natural disaster, or mortgage lending automatically restricted in a region with overheated home prices, or targeted payments going directly to households with annual income below a certain level.

None of that is possible with existing systems, which are too crude, and not nearly efficient enough or data-driven enough, to fine tune currency distribution, and payment restriction, as a matter of policy. With a CBDC you could do all of that and far more.

The capabilities of a high-functioning CBDC sound Orwellian, but governments who embrace that power will have an economic advantage, at least in theory.

CBDCs will also create advantages in the realm of global trade: Picture instant settlements between trading partners, or shipment contracts settled instantly when goods arrive in a port.

Then, too, the more popular CBDCs become, the more that foreign exchange risk will be reduced, because transaction settlement periods will converge on being instant. That will erode the demand for the ultimate middle-man currency, the U.S. dollar, which has long acted as a settlement go-between.

The rise of CBDCs in the next few years is inevitable — and will come on an accelerated timeline — due to the fear component involved.

If, say, China and Europe both have high-functioning CBDC networks and the United States does not, that technology gap will be seen as an economic and geopolitical security threat. 

As it turns out, all of this is excellent news for Bitcoin, because Bitcoin has zero competition.

Any CBDC administered and controlled by a government, no matter how sophisticated, will have the potential for infinite supply expansion, simply because a government controls it.

It will thus be literally impossible for CBDCs — for any CBDC — to replicate Bitcoin’s No. 1 feature, which is absolute scarcity enforced by the iron laws of mathematics.

In a world dominated by CBDCs, currency accounts will be accessed by a web browser or a smartphone app, just as they are today. One-touch payments, which are already here, will also feel much the same as they do today (but with billions more people getting used to them).

The big differences, in contrast, will exist behind the scenes. Crypto-enabled payment rails will make it easy to switch from one base currency to another, automatically, which in turn will make it easy to, say, keep a savings account in Bitcoin while transacting with a CBDC.

Meanwhile, a third-party enabler of the payments layer, like Apple (AAPL), Mastercard, PayPal (PYPL), might handle the details for a nominal fee, the way PayPal works today.

The thing that won’t go away is consumer choice, with respect to the choice of whether or not to keep one’s savings in a currency that gets debased by central banks.

As some have put it, Bitcoin is a kind of peaceful protest in this regard, a means of fighting back against the untrustworthy actor in the global financial system — which turns out to be the government itself.