A glimpse into the future of central bank digital currencies
For a glimpse into the future of silver, take a look at what’s going on in China.
Earlier this month, the Chinese government reiterated its hostility to bitcoin mining as the Central Bank of China stepped up plans to roll out the digital yuan.
The idea behind the digital yuan is to replace cash (which fewer people want to handle after Covid), crack down on cash-related crimes, and improve convenience and transaction costs.
It was also suggested that the digital yuan would give China the upper hand in its trade war with the United States and eliminate the risk of its international SWIFT banking transactions being overheard by the United States, as whistleblower Edward Snowden claims.
Too much (personal) information
Free societies should beware of China’s motives in introducing a digital yuan.
China is perhaps the most heavily guarded society in history, using millions of facial recognition cameras to track citizens. It then integrates that with big data analysis and artificial intelligence to arrive at a âsocial scoreâ for every Chinese citizen.
He introduced the social credit rating system in 2014, award demerit points for bad behavior such as playing loud music, eating on rapid transit systems, breaking traffic rules and jaywalking. You can earn points by donating blood, volunteering hours, or saying nice things about government on social media.
Add a digital yuan to this stew and the surveillance capabilities are truly terrifying. The Central Bank of China will be able to track citizens’ purchases in real time.
âThe digital yuan is both programmable and traceable, giving the Chinese government enormous control over the economy. Not only will Chinese policymakers know all the choices consumers make in the economy, but they could also directly affect spending behavior by making the currency expable on a certain date, âsaid Boris Schlossberg, Forex Director at BK Asset Management , according to Bitcoin.com.
Schlossberg adds that this political goal will backfire, pushing more people into cryptos beyond the reach of authorities.
Although more than 50 central banks around the world are in various stages of researching or planning the introduction of digital currencies, China is leading – despite its hostility to bitcoin.
Bitcoin is the antithesis of central bank digital currencies (CBDCs) – it is decentralized, secure, anti-inflationary and has proven to be a decent, albeit volatile, store of value in 11 years.
Read: Better to be the first on digital currencies
Relocations to South Africa
The South African Reserve Bank (Sarb) recently announced that it is starting a feasibility study for a general purpose retail CBDC.
“Sarb has embarked on a study to study the feasibility, desirability and desirability of a CBDC as electronic legal tender, for general retail use, complementary to cash”, states the Reserve bank in a press release.
âA retail CBDC can be defined as a digital form of cash aimed at providing the best attributes of cash and electronic payments.
“The objective of the feasibility study is to examine how the issuance of a general purpose CBDC will feed the political position and mandate of the Sarb.”
The study will focus on issuing a domestic CBDC that can be used by consumers in South Africa for general retail purposes.
“ Essential ” for financial inclusion
Sonny Fisher, founder of blockchain company Forus Holdings, argues that CBDCs are essential for achieving digital financial inclusion.
One of the goals is to replace paper money with digital currency, which should make a significant leap into the promised era of financial inclusion, while reducing the costs of issuing paper, as well as risks and social impacts.
“We are, however, aware that the introduction of digital currency presents the potential for the state to intrude on our privacy,” says Fisher.
âThis is why the rules relating to privacy, confidentiality and anti-money laundering measures require input from the entire ecosystem. Failure to face these realities will pose a significant risk to digital currency adoption. “
What about the impact of digital currency on money supply and inflation?
The Little Marshall Islands in the Pacific Ocean last year announced the launch Marshallese Sovereign (SOV), a digital currency operating on the Algorand blockchain in parallel with the islands main currency, the US dollar. SOV money supply growth is algorithmically fixed at 4% per year to avoid inflation. This percentage of money supply growth cannot be changed by the whims of politicians or budget emergencies.
Fisher says the perception that CBDCs or digital currency may impact money supply is a misnomer. âRetail currency, both cash and deposits, is only a tiny fraction of the money supply. In fact, the introduction of a single digital store of interchangeable value will reduce the amount of capital that banks, retailers, fintech providers, and money transfer agents need to tie into expensive liquidity pools. .
“The introduction of digital currency is guaranteed to increase GDP per capita and stimulate the growth of SMEs.”
The Sarb feasibility study will include hands-on experimentation on different emerging technology platforms, taking into account various factors, including policy, regulatory, security and risk management implications.
âIt should be noted that while the CBDC feasibility study is different from [another Sarb-led project called] The Khokha project, which focuses on the settlement of high-value transactions between commercial banks and other stakeholders at the wholesale level, the two studies are expected to result in better policy alignment and coordination. “
Monica Singer, SA manager for blockchain company Consensys, says technology is always a trade-off between convenience and the potential for official abuse. In the case of CBDCs, protections can and should be put in place to protect the privacy and security of citizens.
âFor example, the Bank of China offers to track all digital yuan transactions of any size. A much more preferable approach is to emulate the US Digital Dollar Project, which says any transaction under $ 10,000 should be kept private, similar to using cash and KYC. [Know Your Customer] conditions.
âWith the adoption of a CBDC, the cost of issuing banknotes and coins can be reduced, as well as the risk of embezzlement that takes place on vans carrying cash and the bombing of ATMs.
âThe use of blockchain technology can ensure that taxes are collected in real time and that the full audit trail is available,â Singer says.
“The Reserve Bank will be able to distribute the universal basic income and social grants in real time, if that is the policy of the government of the day.”
Singer said implementing a CBDC should be done in cooperation with the private sector. âIt is in the national interest and it requires that the public good be the paramount criterion on the profits generated by third-party intermediaries. As new payment rails are created, citizens should be free to choose the type of money they want to use. I hope that there will be no wall gardens between the different currencies and that free movement is allowed across borders in the future.
Read: Cryptocurrency banking potential in Africa
âProgrammable money will ensure that those funds which are distributed in real time directly into the wallets of eligible citizens or students will ensure that these funds are programmed to be used only for the purposes for which they are intended to be used. This is possible thanks to the smart contract functionality in the Internet of value, which is Ethereum. “
The ideal role of a central bank is to oversee the platform of the CBDC and its governance.
âBanks and other institutions can be the ones that interact with the public to open e-wallets,â Singer adds.
âI would also like to see that CBDCs are interoperable with other CBDCs so that they are portable across peer-to-peer borders, no matter where people live. CBDCs are also expected to be interchangeable with other forms of currency like cryptocurrencies, stablecoins, and the many private coins that will be issued in the future by financial institutions and other private entities like Facebook. [with its stablecoin Diem], or fintechs. “