Central Bank Digital Currency (CBDC), a new asset class and system for global and domestic payments and settlements, has been under active research and development since around 2015. Oddly, the United States (US) seems relaxed about joining the race.
United States makes up for lost time
Reflecting this institutional languor, Jerome Power, Chair of the US Federal Reserve
, said in January 2021, “We don’t feel an urge or need to be first… we already have a first-mover advantage because the reserve currency.” He added, “it could take years rather than months before the Fed releases a CBDC.” This sanguine approach was short-lived.
On March 9, 2022, in the heat of the Ukraine Crisis, President Biden ordered preparation of design and deployment options for a US digital dollar within seven months, including the necessary legislative proposals, and ramped up engagement in global CBDC fora to assert continued leadership of the United States in the international financial system. After all, as President of the 2020 G7, the United States had established the G7 Digital Payments Experts Group to discuss CBDCs, stablecoins, and other digital payment issues.
Was this about turn driven by FOMO, fear of missing out on control over digital fiat money—“the future of money”? Or was it a tardy realisation that the sanctions imposed by the western alliance on Russia, in March 2022, would drive it and its allies towards joining China in a multiple CBDC, cross-border payment system to escape the economic impact of the sanctions? Under the “mBridge project,” China collaborates with the Bank of Internal Settlements (BIS) Hub in Hong Kong, Thailand, and the United Arab Emirates to develop a prototype for an interoperable wholesale CBDC. Competing multiple CBDC systems can end the dominance of SWIFT—the Brussels based, payments instructions carrier and ID issuer for cross border payments, with a share of 50 percent of the business.
Post sanctions in March 2022, it warmed up to using private crypto currencies as an interim, alternative mechanism for foreign trade payments, whilst simultaneously speeding up work on a Digital Ruble targeted for launch in 2024.
Russia does an about face
Conversely, Russia, traditionally dismissive about crypto currencies, started researching CBDC in 2020 to provide an alternative payment mechanism. Post sanctions in March 2022, it warmed up to using private crypto currencies as an interim, alternative mechanism for foreign trade payments, whilst simultaneously speeding up work on a Digital Ruble targeted for launch in 2024.
China plans for the future
China started research on the e-Yuan in 2014. By 2017, it started development and testing and entered the pilot phase in 2020 – the first large country to do so. In February 2022, the e-NYC was available via wallets for visitors at the Beijing Winter Olympics. It is a central bank fiat money, usable for retail and wholesale transactions, intermediated for the public through designated entities, under the full supervision of the People’s Bank of China using the accounting (as opposed to the relatively anonymised “token” form)—meaning all transactions are recorded and monitored. During the pilot stage, 261 million wallets have been registered, and transaction speeds of 10,000 transactions per second achieved (TPS) whilst 300,000 TOS is targeted. In comparison, Visa manages 1,700 TPS, the Hamilton Project a Boston Fed-MIT initiative 170,000 to 1.7 million TPS, while Alipay and Tenpay recorded speeds up to 544,000 TPS in 2019. The launch date remains undisclosed.
Nigeria launched eNaira in October 2021—a central bank fiat currency—for retail use, with an intermediated, full accounting architecture principally to counter the threat of bank disintermediation posed by wide adoption of private crypto currencies for international payments and transfers.
EU makes steady progress
Following on a Report on Digital Euro in October 2020, subsequent investigations confirm that the existing infrastructure of the Eurosystem for instant payments – TARGET Instant Payment Settlement (TIPS) – and distributed ledger technology, could be scaled up to process the roughly 300 billion retail transactions carried out in the euro area each year. In March 2021, the Euro summit members endorsed continued work towards a digital currency. The EU is targeting 2025 for the launch of the e-Euro.
The CBDC race
Of 100 countries considering a CBDC, just 10 have launched one. The Bahamas (population of 0.4 million, spread across 21 islands) was the first to launch the “Sand Dollar”, uniquely a CBDC, which also works off-line, given the inter-island connectivity issues. Eight countries in the Eastern Caribbean followed.
Nigeria launched eNaira in October 2021—a central bank fiat currency—for retail use, with an intermediated, full accounting architecture principally to counter the threat of bank disintermediation posed by wide adoption of private crypto currencies for international payments and transfers. Jamaica is the latest country to launch a CBDC, the JAM-DEX.
Fifteen countries are at the advanced pilot project stage, including Sweden—a forerunner in 2017 with the objective being to wean citizens away from private digital currencies—China, Russia, South Korea, Singapore, Malaysia, and South Africa (the last three collaborate under Project Dunbar), Thailand, Ukraine, and Thailand.
Another 26 countries including EU, Japan, Australia, India, Iran, Turkey, Canada, Venezuela, and Brazil are at the development stage. The US remains in the research category with 46 other countries.
So, why the rush to CBDC?
First, unlike cash fiat money, CBDCs are flexible. They can be cheaply and effectively designed for specific purposes like retail, and wholesale domestic or cross border payments. CBDCs can implement regulatory and policy restrictions better than the existing alternative – conditional transfer of grants to citizens as digital money through banks with subsequent audit on how the money was spent. Payments can be restricted by value, related to the number of transactions or the capital stock (as in China), and enable access to specified goods and services like food, health care or education, public transportation facilities, or paying tax.
Second, CBDC transactions can be tracked, unlike cash money which leaves no audit trail. This is both a blessing and a nightmare. The former because it reins in illegal activity. The latter because it sacrifices personal privacy unless strong protection provisions are legislated, implemented, and independently audited periodically for effectiveness. In jurisdictions where State accountability is low, potential encroachment on citizen rights is a big negative.
Third, CBDCs have the potential to speed up cross border payment settlement. Presently, differential law, processes, due diligence methods and even time zone variations feed into delay and higher cost. Much of the future efficiency enhancement will come from achieving upstream institutional and regulatory cohesion across sovereign jurisdictions. The G20 has been working on this for some time, in association with the BIS and the Financial Stability Board – both international organisations, the former owed by central banks, the latter established after the Western Financial Crisis 2009.
CBDCs can implement regulatory and policy restrictions better than the existing alternative – conditional transfer of grants to citizens as digital money through banks with subsequent audit on how the money was spent.
The Indian way
India has been focused on enlarging citizen access to multiple technology digital payments systems (banks, payment apps and wallets) on a Unified Payments Interface platform. This has now matured with 45 billion transactions in fiscal 2022, valued at INR 78 billion with a target of 1 billion transactions for fiscal 2023.
On February 1, 2022, Finance Minister Nirmala Sitharaman’s budget speech stated, “Central Bank Digital Currency (CBDC) will give a big boost to digital economy lead to a more efficient and cheaper currency management system…. Digital Rupee, using blockchain and other technologies, be issued by the Reserve Bank of India starting 2022-23.” This is a severely compressed timetable, just one year versus the minimum five years projected by other countries, for going from research, development and pilot phase to launch. The hurry might be because India wants to demonstrate CBDC functionality whilst it holds the G20 Presidency in 2023.
The Reserve Bank of India released a Concept Note on October 7, 2022, eight months after the Finance Ministers budget speech, sans any overtones of urgency in implementation. Some preliminary recommendations are that the e-INR would be a fiat currency, a non-interest-bearing asset, usable for both retail and wholesale transactions. It favours the “intermediation” architecture (issued by RBI, distribution by financial given the high cost of institutionalising “direct issue” from RBI and to embed the instrument within the banking and financial industry—both public and private—for continuing innovation).
For retail use, a “token” form, usable even offline, might be considered to promote financial inclusion. For wholesale use, the centralised “Accounts” method is favoured. Recognising the virtues of anonymity, a hybrid, graded approach (low value, high anonymity and vice versa) is suggested—admittedly difficult, since an address ID or telephone number are minimum requirements today for mobile apps. Legislative changes are also recommended to the RBI Act 1932 to enlarge the mandate of the RBI to the subject of CBDCs and related matters.
The RBI was never in favour of legitimising private crypto currencies as a payment mechanism in India. It apprehended a significant diversion of savings away from banking to a volatile asset class, which, till mid-2021, was a one-way street to “quick riches” with the associated threat of loss of control over monetary policy by the RBI. Without intervention at the highest level, the e-INR is likely to languish between the silos that fragment Indian governance arrangements. Sadly, the prospects of a unified global approach to digital currency are no better, given the fracturing of geopolitics into contesting silos. Central bank digital currencies are the children of globalisation. Only global leadership can save them from being orphaned at birth.
Without intervention at the highest level, the e-INR is likely to languish between the silos that fragment Indian governance arrangements.
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