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Why the world’s top monetary authority is standing aside in the CBDC debate


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Hey Fintech Fam!

Exciting news. This newsletter is returning to its weekly cadence with our new London-based co-editor Sid Venkataramakrishnan taking the lead from next week.

You can expect the same global analysis of the latest technology trends disrupting the finance world from our FT colleagues, with Sid and myself alternating as curators. Email us at [email protected] and [email protected].

Today’s edition features a dispatch from Frankfurt bureau chief Martin Arnold, who dives into why the rhetoric around central bank digital currencies varies so much by country. Sid also spoke to a South African start-up founder changing the way entrepreneurs manage their cash.


US lags Europe and China in central bank digital currency talks

Central Banks around the world are considering setting up their own digital currencies (CBDC) but enthusiasm for this idea seems to be significantly greater among policymakers in Europe and Asia than in the US. 

China has forged ahead with widespread trials of a digital renminbi and recently boasted that 140m individuals and 10m businesses have opened accounts to use the digital currency, known as e-CNY. European leaders hope to catch up soon.

“With digitalisation at full speed, central banks must prepare for a digital future in which demand for cash as a medium of exchange may weaken, requiring the convertibility of private money into cash to be complemented by convertibility into central bank digital money,” Fabio Panetta, the European Central Bank executive overseeing its digital currency project, said in a speech in Madrid on Friday.

The tone of his speech could hardly be more different to comments a few days earlier by Randal Quarles, outgoing US Federal Reserve governor, who said the risks of a federalised digital dollar outweigh the benefits. Earlier this year, Quarles dismissed the idea as a fad similar to “parachute pants” that many people proudly wore in the 1980s but now regret.

Some US monetary officials have publicly supported CBDCs. However, it is telling that the Fed still has not published its long-awaited paper (originally due to appear over the summer), which would examine the pros and cons of launching a digital dollar and seek public comment.

The Bank of England has already published two discussion papers on a digital pound. The ECB this year completed public consultations and decided to start formal preparations to potentially launch a digital euro in the next five years.

To understand the lack of urgency at the Fed, it helps to consider a deceptively simple question: What is the problem central banks aim to solve by launching a digital currency?

Do they want to: A) Prepare for a cashless future? B) Improve the efficiency of payments? C) Counter the threat from crypto assets? D) Boost financial inclusion? E) Preserve their monetary sovereignty? F) Collect more financial data?

Some assume China’s main motivation for launching a digital renminbi is to bolster its ability to monitor and control its citizens, even though it says users will have “managed anonymity” and declares its aim is to provide “convenient, safe and inclusive” payments.

In Europe, policymakers see a digital euro as a way to defend their monetary sovereignty against the threat from private sector digital currencies, in particular so-called stablecoins — a type of cryptocurrency that is nominally pegged to underlying assets to limit price fluctuations.

“Innovative forms of private digital money are emerging in response to changing needs, which are transforming how we pay and the payment landscape more broadly,” said Panetta. “These developments touch at the core of central banks’ mandates as issuers of sovereign money.”

However, Fed officials seem less worried about the rise of stablecoins. With the majority of leading stablecoins pegged to the dollar, their rise in popularity strengthens the reach of US monetary policy rather than threatening it, Christopher Waller, another Fed governor, said recently.

As central banks mull whether to launch digital currencies of their own — something the Bahamas has already done with the Sand Dollar — it seems clear that the most influential monetary authority, the US Fed, will be happy to wait and see what happens rather than leading from the front. (Martin Arnold)

Quick Fire Q&A

Every week we ask a fast-growing fintech to introduce themselves and explain what makes them stand out in a crowded industry. Our conversation, lightly edited, appears below.

Sid recently spoke to Andrew Watkins-Ball, founder and chief executive at emerging market financial services company JUMO, which today announced a $120m funding round, led by investors including Fidelity and Visa. That brings its total fundraising in the year-to-date up to $200m, with other investors including Goldman Sachs, Vostok Emerging Finance and Brook Asset Management. The company provides entrepreneurs across several emerging markets with access to savings and credit products, using machine learning to match lenders to businesses. Since launching in 2015, it has helped to set up over $3.5bn in loans with over 18m customers.

How did the company get started? 
I’m an ex-banker, born in South Africa but very much part of the City of London where I was previously at Salomon Brothers. My thinking is that if you remove the costs between people, the end user makes money. JUMO was founded in 2015 and always had an orientation towards social impact. There was also a focus on information theory and leveraging data. We use tech for moving capital around fast and we can do it for less than a dollar [per transaction].

How does JUMO support entrepreneurs in emerging markets?
Take an agricultural trader who wakes up early in the morning and does her business for the day — maybe buy some supplies and trade. On her mobile, she can choose a loan product instantaneously from a range of banks. That allows her to buy stock, which she can trade later in the week and repay the working capital. Right now, the process is largely physical, although mobile money systems are growing as much as 50 per cent year- -on-year.

How does the AI component of JUMO work?
Our system is entirely information orientated. From 2015, we’ve only had access to behavioural information, which means we had to come up with a new way of doing things. 120m loans later, the training sets of data have helped us reduce the cost of borrowing by 90 per cent, and bring interest rate costs down 80 per cent. We don’t use the data for anything other than helping our customers. One of the benefits of using machine learning is that there are no data fields [for sensitive subjects such as ethnicity]. Proxies for these fields are monitored for any discrimination, but also for behaviours which could suggest the use of loans for gambling or fraud. And it has to be very sophisticated to account for banking partners with different levels of risk appetite.

What differences have you found operating across different emerging markets?
One of the benefits of information at scale is that it can be extrapolated across markets. That allows us to see that customer behaviour is very similar. The average loan value is $50 for 45 days, which is made up of a combination of repeat and new customers. We recently went live in Côte d’Ivoire. We’re building in Cameroon and Nigeria and considering Egypt. Emerging market entrepreneurs don’t want kid gloves — they want better tools. And behavioural information at scale will start to be applied in the US and the UK, where currently lenders make decisions really just based on a credit bureau. That’s not building an information advantage. We [on the other hand] have nearly six years of just using behavioural and location information.

How have views on investing in African fintechs changed since you started?
This investment round, led by Fidelity, is the first time it has done a private deal in Africa. Others will follow if they do well. The fintech boom has very much been driven by the US on both the product innovation and capital side. They are the pros at funding early stages, and they are now fuelling the maturing stages. African fintech needs success cases to get more funding into the markets. Increasingly though, we are speaking to investors in New York or San Francisco, saying ‘we’re going to be allocating investment to Africa’. That was not the case three years ago.

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