Central Bank Digital Currencies need a unified global approach given the fracturing of geopolitics into contesting silos
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.
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.
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.
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 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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Sanjeev S. Ahluwalia has core skills in institutional analysis, energy and economic regulation and public financial management backed by eight years of project management experience ...
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