Hi folks, today I take a look at Central Bank Digital Currencies (CBDC) i.e. the central banks replacement of fiat with their own version of crypto currency including the recent digital dollar proposal, China’s ambitions to use CBDC to track financial transactions, Marshall Islands proposal to issue it's own CBDC which will coexist with the US dollar as it's official currency, Swedish Riksbank's e-krona, RBI's fixation with banning crypto currencies despite a Supreme Court ruling otherwise and recommendations of an expert panel to leave the door open to issue it's own CBDC, Venezuela's failed attempt at issuing a CBDC named Petro which was backed by it's oil reserves and Bank of England's feedback call on measure the pros and cons of issuing CBDC. I also take a look at how fintech companies can benefit from such a proposed CBDC.
According to Tao Zhang, deputy managing director at the International Monetary Fund,
A domestically issued digital currency backed by a trusted government, denominated in the domestic unit of account, may help limit the adoption of privately issued currencies (e.g. stablecoins), which may be difficult to regulate and could pose risks to financial stability and monetary policy transmission.
In recent times with rising global internet penetration and the shift to digital in many countries, some central banks have started discussions on the proposals to issue digital currencies as cash use drops across the globe rapidly and the evolution of bitcoin and other alt coins and Facebook's push to launch it's Libra cryptocurrency have unnerved many of these central banks.
The French government has earlier been a foremost opponent of Libra and the Bank of France has now started it's own experiment with CBDC’s as part of their digital euro project.
Though most of these are just proposals nothing concrete except maybe China (though scarce details are available), Marshall Islands and Sweden which appear to have moved quite ahead in developing a supplement to their own fiat and alternative to decentralized private crypto currencies.
Even the Bank of Japan has said that it will not be issuing a digital currency in the near future putting all speculations to rest.
According to Brookings Institution,
In September, U.S. Reps. French Hill (R-AR) and Bill Foster (D-IL) wrote an open letter to Fed Chairman Jerome Powell urging the Federal Reserve to consider developing a U.S. dollar digital currency. Former U.S. Commodity Futures Trading Commission chairman J. Christopher Giancarlo also called for the Fed to issue a digital version of the U.S. dollar to maintain its popularity for international payments.Among the central bankers, Philadelphia Federal Reserve President Patrick Harker thinks a digital U.S. dollar is inevitable, but argues that the U.S. should not be the first country to issue a CBDC.
The Fed meanwhile too has been actively researching on about issuing a digital dollar but as I said before it's all just proposals with nothing concrete emerging to counter the situation if the US dollar loses it's position as the global reserve currency.
China has been leading from the front in the development of it's CBDC the digital renminbi. It's strategy of distribution too seems to be that of partnering with fintech companies like Alipay and Wechat. According to the newest details, China wants to create a digital equivalent of it's banknotes instead of single units of yuan. But privacy risks remain very serious considering the country's previous record. The advent of Facebook's Libra seems to have accelerated the development of digital yuan.
Even though the IMF has opposed and warned against the implications both economic and governance risks of developing such a digital currency, Marshall Islands seems to be in no mood to slow down despite facing opposition from within the republic, with an intent at reducing their reliance on the US dollar as their national currency (though it will still remain legal tender) they have marched ahead full steam towards their proposal. Called Marshallese Sovereign (SOV) which is being built on the Algorand blockchain by SFB Technologies. It remains to be seen how the final version of this CBDC turns out and how much of an impact it will have on the small island country.
Sweden's Riksbank has been exploring the possibility of issuing a CBDC called e-krona since 2017 for the same reasons of declining cash usage and to prepare for a digital future. The most common technology partner which has been partnering central banks is accenture which has partnered with the Riksbank to conduct a pilot project and develop a proposal for a technical solution for e-krona.
India's Reserve Bank has been a consistent opponent of private cryptocurrencies and had banned banks regulated by it from allowing their customers to conduct crypto transactions until the ban was overturned by the Supreme Court last month considering RBI's decision to be a extreme and without statutory backing. An high level inter ministerial panel led by the secretary of the department of economic affairs recommended to ban all private cryptocurrencies and pitched for the introduction of a RBI issued CBDC to be granted a status of legal tender. Though no action has been taken on the basis of these recommendations as of yet.
Venezuela attempted to launch a cryptocurrency called Petro which was backed up by its massive oil and mineral reserves in February 2018. Though with massive inflation caused by financial mismanagement and election fraud and the lack of export ability of oil and a ban on americans due to US sanctions severely limited their ability to sell Petro which is linked to the main currency bolívar soberano as of today the petro currency is no where to be found and there is no evidence that it has been ever used.
Bank of England published a discussion paper on March 12,2020 to discuss the possibility of issuing a digital pound sterling to respond to the declining cash usage with debit cards replacing cash as the preferred payment method. This is interesting because the UK has been one of the leading adopters of fintech and has also been receptive of digital challenger banks which have achieved great adoption across the country. So if the UK turns serious and does issue a CBDC of its own in the future it would much likely see much higher and faster adoption as compared to other nations.
Some other central banks including the Bank of Canada have also started discussions on proposals related to issuing CBDC.
Perhaps the biggest con of such a centrally issued digital currency might be absolute surveillance destroying anonymity and privacy of monetary transactions as central banks, governments and their third party partners will be able to track your every transaction i.e. where and how much you have spent, they will be able to get a complete record of your spending habits thus becoming a valuable tool in the governments mass surveillance programs, they will be able to track each unit of the CBDC during it's lifetime, private blockchain based bitcoin and even some other alt coins though not completely anonymous & untraceable are certainly more secure and are an attempt at getting more privacy in transactions than these proposed CBDC's.
A CBDC will also be issued upon a permissioned blockchain with only restricted users having access and have a single ledger or have distributed copies of the ledger run on nodes controlled by the central banks or other authorized parties unlike the decentralized character of other private blockchain's where no single person or entity controls the blockchain on which the currency is issued aka an open blockchain.
CBDC is completely different from the digital money which is currently used by people in the sense that it is issued by commercial banks and is neither issued nor backed nor guaranteed by the central banks.
A CBDC is certainly much more likely to see fast adoption among the masses due to the trust factor i.e. the CBDC is backed up by the issuing central bank while in the case of private cryptocurrencies the trust factor is lacking. The probability of frauds are also more in private cryptocurrencies while regulated CBDC's will certainly have more protection against fraud and have KYC and anti money laundering provisions.
So where does fintech fit in, for decades banks have been the primary point of contact for people around the globe for everything related to money but their legacy systems, unreasonable charges and slow adoption of rapidly changing technology have led to large number of unbanked people and left a large number of people unsatisfied due to terrible customer service. With CBDC coming in the central banks have a chance to replace these intermediaries which will very much slow adoption and partner with third party fintech companies to directly offer access to money, savings and faster transactions to those unbanked and lacking access to the traditional financial services system. It will also lead to faster adoption and provide a better experience for the people. Fintech companies certainly have the technology to reach any person with an internet connection instead of limiting people to bank branches which in several places is the norm currently such as rural Africa, India and the US. It could also make cross border transactions cheaper and faster by partnering with fintech companies using modern payments infrastructure. Though the most benefit would be in a situation of a pandemic such as this when contactless payments have become a thing with mastercard asking for higher payment limits across the globe which would be surely easier with CBDC.
If you like what you're reading , sign up here for more.