Central banks around the world have historically been heavy on academic theory and light on technological innovation.
The last decade has pushed these institutions out of their comfort zone though.
They have had to deal with multiple economic crisis, while also fending off pressure from private fintech companies.
These fintech companies started out as innocuous products that have now grown to dominate the lives of billions of people around the world.
Whether we are talking about the United States, China, or elsewhere, you would find it hard to locate a population of citizens that doesn’t use technology-enabled products to interact with money.
It was only a matter of time before the non-government innovation eventually infiltrated money itself.
We have now seen this occur from pseudonymous/decentralized products (Bitcoin), private sector corporations (Libra & Facebook), and even inter-country competition (ex: numerous countries trying to get off US dollar reserve status).
It was previously thought that governments had a monopoly on money, simply because they had a monopoly on violence.
However, that is proving to be inaccurate in today’s digital world.
We are watching a situation unfold where central banks are going to be forced to compete on a level playing field, rather than rely on their monopolistic position.
Just as technology incumbents that came before them, central banks are now facing the classic innovator’s dilemma.
They can’t disrupt themselves.
It would be catastrophic to significantly change the status quo.
Central banks enjoy a position of power.
They have “control” over vast economies.
The system is working as designed currently.
Any issues that exist seem small and insignificant today, which means it is too “profitable” of a model.
The benefits drastically outweigh the negatives in the eyes of central banks
This is how disruption happens.
Most people believe that incumbents never see the innovation and disruption coming, but that isn’t true.
In fact, the incumbents are usually very aware of what is happening.
They just don’t believe it has importance, nor do they think it has the potential to actually disrupt them.
Blockbuster knew about Netflix.
They just didn’t see it working at the size and scale it eventually did.
Every search engine knew about Google.
Myspace quickly was aware of Facebook.
The list goes on and on.
And every central bank is intimately familiar with Bitcoin and the promise of the technology.
Most of them just don’t think it has the potential to actually disrupt them.
These central banks are instead choosing to build their own digital currencies — central bank digital currencies (CBDCs).
Today a new report was published by the Bank for International Settlements and 7 central banks, including BoE, ECB, and the Federal Reserve.
It specifically lays out the requirements/recommendations for CBDCs.
According to Ryan Browne at CNBC, “Among the recommendations the central banks made were that CBDCs compliment — but not replace — cash and other forms of legal tender, and that they support rather than harm monetary and financial stability. They said digital currencies should also be secure, as cheap as possible — if not free — to use and “have an appropriate role for the private sector.”
As I said, the innovator’s dilemma playing out perfectly.
The central banks don’t want to disrupt the status quo.
They want digital currencies to compliment the existing system, rather than replace it.
That isn’t how technology works though.
The superior innovation, as long as it gains market adoption, will eventually render the incumbent technology or system irrelevant.
Blockbuster eventually introduced movie streaming as a product line almost a decade ago, but the competition was already over.
Netflix had become too popular and Blockbuster didn’t want to fully focus on what was obviously the future technology.
They wanted their physical movie stores to co-exist with their movie streaming offering.
In hindsight, it is obvious that Blockbuster should have quickly disrupted themselves and gone all-in on streaming.
Hindsight is always 20/20.
I believe we are going to look back decades from now and point to the fact that central banks didn’t take Bitcoin seriously enough, which ultimately led to their demise.
They took the Blockbuster route. Co-existence.
Have the cake and eat it too. T
hat isn’t how the world works though.
Technology doesn’t care about your plans, your feelings, or your concerns.
The market is ruthless.
It adopts the best solution.
Network effects are nearly impossible to break once they get going.
All of this is pointing to the inevitable, the academic theories and central bank reports stand no chance against the 100+ million people who have already chosen a different path.
Soon it will be 1+ billion people.
Then it will rise to 3 billion.
4 billion.
And eventually all 7+ billion people will adopt the native currency of the internet.
Just a matter of time.
It is scary to think about central banks being disrupted, but it feels like a foregone conclusion at this point.
I’m spending my time thinking about how this plays out.
Where is the opportunity?
What are the risks?
How can people navigate these significant macro transitions?
I’ll continue sharing my thoughts and opinions in the coming months, but at this point one thing is for sure — Bitcoin forced central banks into the innovator’s dilemma.
Have a great weekend.