Crypto Corner: Digital Money Goes Global

As the world of digital money evolves, not only are ordinary folks adopting it, so are governments. In an effort to get the jump on possible disruptions to financial systems that cryptocurrencies hold, governments across the world are looking to create their own digital currencies, called Central Bank Digital Currency (CBDC). Unlike “traditional” cryptocurrencies, CBDCs are a digital form of central bank currency for use by the public that is pegged to the value of that country’s fiat, so it’s basically a digital form of that country’s fiat currency.

And there are plenty of reasons a government would prefer a CBDC. First, a CBDC would allow the government to send instant payments to its citizens (think of the trouble we had here in the US with the stimulus checks). Next, a CBDC would enable faster payments because payments would clear instantly. Third, a government can surveil every transaction that takes place with their digital money (though this is controversial, it would be possible) and could freeze accounts and reverse transactions, which is not possible with cash (imagine if we were given money for food rations, and it was programmed to only buy certain items). Forth, CBDCs would allow people without bank accounts to have access to currency and transact. Lastly, digital currency would give central banks a lower-cost alternative to cash for providing a national payment method.

Who’s Doing It

It has been postulated that, within the next ten or twenty years, every country will have their own CBDC. A growing number of countries are working on building their own CBDCs for launch or have already completely launched, a reported 85% of global banks. Just a few of the countries that are in some stage of development of, or have launched, CBDCs include China, Sweden, The Bahamas, Canada, South Korea, Nigeria, and Japan, with The Bahamas being the first to launch its nationwide CBDC, called the Sand Dollar, in October of 2020.

The Sand Dollar, an extension of the Bahamian dollar, is traded via mobile phones. According to the country’s Central Bank Governor, John Rolle, the project began when the country decided to modernize its payment systems and identified the need for new payment service providers that would allow all providers to connect and communicate. This is because of the difficulty posed by island geography, where banks don’t always play well together, but the need was also highlighted by natural disasters, when people found that they didn’t have access to banks or physical money. As of right now, there are a little more than 300,000 Sand Dollars in circulation.

Nigeria was not far behind The Bahamas, launching their CBDC the eNaira, after three years of development in October of 2021. The eNaira is issued and backed by the Central Bank of Nigeria (CBN), and was created because of its cost efficiency, ability to help the unbanked get access to currency and be able to participate in the economy, and the ability it lends the government to limit illicit activities. Although, this last bit worries citizens because of the element of surveillance attached to it, the government could do so with impunity.

Launch of the eNaira came with the launch of an accompanying website to help users understand and get started with the currency, and the process is fairly simple. First, a user downloads the eNaira mobile application. Then, they register and create a wallet, called the Speed Wallet, to send and receive money. Users have access to different tiers of the wallet depending on whether they have a bank account or not and their identity. The currency has four primary features: a unified payment system, bank account management services, contactless payment, and P2P payments (which allow users to send payments to one another).

No conversation about cutting-edge innovations would be complete without mentioning China, which has become known around the world for its willingness to pioneer new technologies… and digital currency is no exception. China has created and began the rollout of their own CBDC, the digital yuan, which has been dubbed e-CNY. The e-CNY is being piloted in 10 major cities in China and, as of earlier this month, was being rolled out to even more cities including Tianjin, Chongqing, Guangzhou, Fuzhou, Xiamen, and six cities in the coastal Zhejiang province.

The People’s Bank of China (PBOC) is going hard promoting the research and development of the currency, hoping to continue to expand its use. The PBOC is reportedly looking forward to the provincial capital of Hangzhou hosting the Asian Games in September as an opportunity to promote its broader adoption, which they had hoped to do with the Beijing Winter Olympics (those plans were hindered by COVID-19). The PBOC held its first-ever symposium on digital currency last month.

CBDCs Raise Concerns

While central banks all over the world go full steam ahead on CBDCs, some citizens and critics have concerns. But it’s not just citizens, it’s also governments raising concerns about the possible intentions of other countries and their rush to adopt CBDCs. For example, the U.S. has questioned the intentions of China, with a former senior advisor to the US Treasury publishing an article last summer raising the possibility that China could potentially be looking to get around US financial sanctions with the e-CNY.

CBDCs are trackable, and could allow governments to peek into, or even restrict, user’s activities. It’s easy to imagine a scenario where a customer is in debt… say, behind on taxes, or they have violated a law and a wallet gets shut down without input from a user and without any recourse on their part. It’s also not outside the realm of possibility that CBDCs could be used to form financial alliances, with some countries locking out others through strictly digital money and no form of hard currency.

Regardless of these concerns, adoption is gaining speed and more countries are creating their own digital currencies. We’ll simply have to let time pass and watch as the ramifications of the technology unfold. Be sure to come back for future issues, as we continue to cover the exciting frontier of the world’s newest experiments with central bank digital currencies.