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CBDCs: Geopolitical Ramifications of a Major Digital Currency

CBDCs and private stablecoins promise to change the landscape of payments and the global economy. How is the Eurozone currently positioned, and what effects could a digital Euro have on this?

To read more about the geopolitical ramifications of a major digital currency, download the full report.

The launch of a major economies’ CBDC is imminent. Looking at the current landscape of global financial powers, this report delves into how a major digital currency - namely a digital Yuan - will change this. How necessary is a European CBDC, and what changes might it bring?

With most reports focused on technical aspects, it’s time to look at how digital currencies will impact the prominence of the Euro. A widely adopted digital currency could force the Euro out of its position in second, especially with the US Dollar showing no signs of budging from the top position.  Based on this, we explore the necessary steps to protect its current position and how a digital Euro might lend to this goal.

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Who are the major economic powers?

To read more about the geopolitical ramifications of a major digital currency, download the full report.

The US Dollar has been the global reserve currency since the 1920s. Reserve currencies are used as ‘common’ currencies for international trade. They are often held in reserve to protect against exchange rate fluctuation.

Global reserve currencies tend to fall out of prominence after 80-111 years. Given this and the current political instability in the US, some speculate that we are due for a shift in top financial powers.

China is particularly invested in toppling the Dollar, and has implemented multiple strategies to do so. Near the forefront, are plans for a digital Yuan, or Digital Currency/Electronic Payment (DC/EP). Currently, the Yuan is the third most held reserve currency.

The Euro holds the second top position globally. While some believe that the launch of a major CBDC will be enough to unseat the Dollar, others warn that the reserve currencies that currently sit behind it will see the greatest decline. This leaves the Eurozone to suffer the most.

What are the implications of a strong or weak digital Euro?

To read more about the geopolitical ramifications of a major digital currency, download the full report.

Launching a digital Euro provides the opportunity for the Eurozone to revisit its goals. This could revitalise commitment of the different member states.

As the currency for multiple nations, the Euro has long been somewhat controversial. Stronger economies, like Germany, push for a stronger Euro, while weaker economies, like Italy and Greece, want a weaker Euro to help boost trade and economic growth.

Brexit further complicated the Eurozone, as even though the UK does not use the Euro, it revealed fractures in the EU on a whole. Reinvigorating commitment to the shared currency remains a primary concern.

A strong digital Euro would boost domestic demand, while a weak digital Euro would drive international demand. Either way, launching a new currency will have a significant impact on the region, as well as global trade, if it is widely adopted. Digital payment systems continue to draw interest for the new opportunities they will bring to businesses.

Alternatively, national European CBDCs threaten the strength of a single currency. Each country would likely push for the use of their own currency. As many European countries are already exploring CBDCs separately from the ECB, moving quickly on a well-designed digital Euro may be necessary to retain the global prominence and relevancy of the currency.

What changes could digitisation bring in the next decade?

To read more about the geopolitical ramifications of a major digital currency, download the full report.

Several smaller nations have already played with launching digital currencies, with the Bahamas issuing the first fully digital tender - the Sand Dollar. However, the lack of impact on global financial markets makes it clear that a major economy will have to launch a CBDC to see large-scale effects.

The same holds true for privately-issued stablecoins, which although gaining popularity, have not seen mass adoption.

While it’s unclear exactly how far along a digital Yuan is, China does appear to be the closest to launching a CBDC - far ahead of either the US or the ECB. 

Based on this information, we predict that:

  • A digital Yuan will not unseat the Dollar.
  • CBDCs will have to play nice with private stablecoins.
  • Three to five nations globally will completely replace their currency with a CBDC by 2030.
  • Smaller nations will consider switching to the digital Dollar.
  • The Euro will be overtaken by the digital Yuan if Europe has no CBDC by 2025.