Fin-TECH

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Project New Era is a privately led initiative evaluating the path towards a retail Central Bank Digital Currency (CBDC) in the UK. The project proposes closer public-private collaboration in order to address key challenges and open questions relating to CBDC development.

The project commences with a Green Paper, co-developed by business leaders from across the financial ecosystem. The paper examines the case for retail CBDCs, details core design considerations, and proposes a roadmap for collective, public-private experimentation. The paper is a call to action for industry stakeholders including businesses, central banks, regulators, government officials and researchers.

Definitions of core concepts and financial instruments vary significantly across existing CBDC literature. This paper attempts to standardise terminology, but recognises the diversity of perspectives that exist. For avoidance of doubt, the paper solely considers the development of a CBDC ecosystem, and does not focus on cryptocurrencies. In this paper, a retail CBDC refers to a digitised form of M01 money, coexisting alongside cash and issued by a central bank as a direct liability for general purpose, domestic circulation. We also raise the potential for CBDC to form a new monetary category beyond M0 money, including as an on-balance sheet commercial bank liability to mitigate any potential bank disintermediation.

The paper first analyses recent dynamics in the payments industry and the emergence of privately issued digital currencies, determining that market trends and existing payment inefficiencies are creating a platform for change. 

(Continue reading the paper by clicking the green button to the right)

 The world is experiencing a geopolitical recession, characterised by a phenomenon of gradual de-globalisation and balkanisation of global supply chains. The framework in which this geopolitical recession is taking place is what we call Cold War 2. It is between waged between the United States and China, and has several dimensions which we will explore in this article.

This geopolitical recession may become a depression, if the conflict between the two global superpowers intensifies further. In this respect, the war between Russia and Ukraine represents a very concerning signal, since it has fundamentally altered the geopolitical equilibria that had been reached at the end of World War 2. We interpret this conflict as the first proxy war between the US and China. 

The war in Ukraine has further accelerated the polarisation of the world, into two sphere of influence: one around the US and their allies, and one around China and its allies. Very few countries, chiefly India and a few in the Global South, will be able to remain “non-aligned” with either of the two superpowers. In this environment, the international fora for global governance have become ineffective.

In this context, we explore the possible role for Europe, and its technological advancement, followed by the necessary regulatory adaptation to accommodate these inroads. 

This paper is organised as follows: Chapter One explores the context of Cold War 2, which is the scenery against which all macroeconomic, geopolitical and technological developments are happening. Chapter Two explores the possibility of proxy wars in those countries and regions that have not fallen directly into either sphere of influence. Chapter Three discusses the technological advancements made by Europe in the context of a re-shaped global economy.

The European integration process has been characterized by  a series of setbacks, which have then been followed by important advances. The latest setbacks were represented by the migrant crisis of 2015, the Brexit referendum in 2016, resurfacing euro re-denomination risks in 2018-19 and finally the Covid-induced crisis in 2020. All these events occurred while internationalism was deteriorating, amid the victory of an isolationist US president, mounting trade and geopolitical tensions between major economies, the ongoing balkanisation of global supply and value chains and an underlying technological conflict between  the US and China (in which Russia and the EU were inevitably engaged). The resulting polarisation of the world into spheres of influence dominated by the US and China amounts to what has been labelled Cold War 2.

Given this context, the EU – while implementing Brexit – has been confronted with yet another existential crisis, reinforced and brought forward by the Covid-induced crisis. EU leaders had to decide in just a few months whether to give up the project imagined by the founding fathers, or else re-launch it, and so pass it to the next generation of leaders, who will eventually decide its fate.

The decision to react to the Covid-induced crisis by launching a comprehensive pan-European plan, based on the EU’s Multiannual Financial Framework – significantly dubbed the Next Generation EU – means that current EU leaders have chosen the latter course, making the decision to push integration to new levels.

The novelty represented by a US president who was not just simply isolationist and lukewarm regarding the European integration process, but openly hostile to it and in favour of further exits from the EU, as well as in favour of diminishing the presence of NATO in the region (with the US decision to withdraw many of its troops from Germany) has induced even the most prudent politician of her generation, the German Chancellor Angela Merkel, to declare that the Europeans are on their own and need to grasp their destiny with their own hands, without relying any longer on the external influence, pressures and financial and military subsidies from the US. As we discuss further in this report, the election of Joe Biden is not likely to change this state of affairs. Across Europe, the congratulation messages to Joe Biden started to flow in a coordinated manner within minutes of one another, in a clear message to the newly-elected US President to count on a united front within the EU.

In parallel, the Covid-19 pandemic has hit the EU, showing the essential role played by the technology sector in ensuring the continuity of social life, businesses and government activities, and accelerating the need for sovereign digital technologies. Technology ranging from AI and 5G to Cloud computing – the new battlefields for China and US to assert their global supremacy - has already started to transform every industry, and within a generation will have done so completely. This New Paradigm represents a huge additional threat to each EU country separately, but also represents a once-in-a-lifetime opportunity for the EU if it manages to position itself well in the new global chessboard. We will discuss further in this document the initiatives which have been launched in the field of technology and innovation.

In short, the Europeans have realised that they need to remain cohesive if they want to have a role in the bi-polar world that is about to emerge. In the paper we discuss the main areas of European integration: Financial, Defence and Technological.

There might, hypothetically, be a clear winner of the “Fourth Industrial Revolution”. AI systems and 5G technology are surely the revolution’s two key enablers,and the first mover - the first to successfully implement these systems on a large and sophisticated scale - will certainly gain a competitive advantage over others. This is not, however, a winner-take-all game. There is rather a potentially virtuous cycle, whereby technologies attract the talent and capital which, in turn, stimulates innovation further by utilizing the enormous amount of data generated by this technological-industrial revolution.

Nevertheless, states and private-sector participants should also start thinking about which directions we collectively wish to take these new technologies. Most companies and governments are now in the process of setting up their AI and 5G technologies; given all the blurriness surrounding this topic, we believe it would be best to pause for a moment, to first understand what we are aiming for and why.

Sooner or later, 5G and AI will deeply affect our lives, influencing sectors such as fintech, health care, manufacturing and even agriculture. Thus, 5G security and AI ethics should always be on governments’ to-do lists. Political leaders sometimes seem to forget that. A few positive steps have been taken regarding this issue, including a pledge not to develop lethal autonomous weapons by DeepMind founders, Skype founder Jaan Tallinn, Elon Musk and some of the world’s most respected and prominent AI researchers. This is particularly relevant in a world that is becoming increasingly polarised by a Cold War between the US and China, whose technological rivalry is a key (if not the key) component of their broader political rivalry.  

We believe that technological supremacy will be achieved by countries that are able not only to devote the largest amount of investment to areas such as AI and 5G, but rather are also able to provide a combination of vision, strategy, resources, ethics and real applications,where emerging technologies are concerned. 

Currently, the quality of engineers and the ability to attract quality employees are, along with competitive open markets and a strong influence on allies, the key advantages of the US in this race. On the other hand, China is ahead in the game, given its authoritarian state, huge domestic market, reduced privacy concerns and head-start in 5G. In spite of this, the United States will definitely not sit back and watch the Chinese continue to pull ahead.

In this contest Europe appears behind, out of the ring so to speak. Holding back on its quality research and internal states’ divergence. It is time for the Old Continent to shake up and create a clear common strategy.

Yet, this is and will continue to be one of the toughest technological fights ever .