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@ Yaka Stuff (RSS Feed)
2023-07-21 16:47:49The Weekend #150—The problem with CBDCs
(https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fbad54c3e-b351-4c32-9980-81e48edb57c3_3891x2506.jpeg)Let’s start with some numbers from the Atlantic Council (https://www.atlanticcouncil.org/cbdctracker/):
130 countries, representing 98 percent of global GDP, are exploring a CBDC. In May 2020, only 35 countries were considering a CBDC. A new high of 64 countries are in an advanced phase of exploration (development, pilot, or launch).
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19 of the G20 countries are now in the advanced stage of CBDC development. Of those, 9 countries are already in pilot. Nearly every G20 country has made significant progress and invested new resources in these projects over the past six months.
That there’s a consensus around the need for upgraded digital money shouldn’t be surprising. Faster, cheaper, and more inclusive payments are directly correlated with economic growth. Meanwhile, our legacy systems for money and payments are antiquated—slow, expensive, and in many cases, exclusive.
Then you have cryptocurrencies and stablecoins already demonstrating the potential forreal-time digital value out in the wild.
Naturally, countries are going to explore their own options. But while some are a bit ahead on the CBDC development front than others, it doesn’t appear that they’ve achieved the results they may have been hoping for—at least so far.
Here’s Chris Skinner (https://thefinanser.com/2023/07/why-cbdcs-fail-a-lack-of-trust-in-authorities) (via Greg Kidd):
For example, China ran a PoC of the eYuan during the 2022 Winter Olympics in Beijing but the adoption, by summer 2023, has been disappointing. They even gave away millions of dollars in digital yuan in several cities, such as Beijing and Shenzhen, encouraging citizens to use the virtual money but it did not succeed. Transactions using the currency totalled just 100 billion yuan ($14.5 billion) by the end of August 2022. Compare that with Alipay, one of two major payments apps (the other is WeChat Pay) in China, whose app was processing app $1.6 trillion each month on average — more than a thousand times the digital yuan’s monthly transaction volume at that time.
The same happened in Nigeria. Nigeria’s released their CBDC, the eNaira, in 2022 to widespread interest. However, as of October 2022, it barely had any usage within a country full of crypto-curious investors, and this has meant that there are views it will need to be redesigned and relaunched.
In fact, to put this in context, Nigeria has a shortage in the supply of Naira paper notes[2] and yet people don’t want to use the eNaira and, instead, prefer cryptocurrencies. With a total cryptocurrency transaction volume amounting to USD$400 million, Nigeria ranks third after the United States and Russia in their use of such currencies and, according to a 2020 online survey by Statista, 32% of participating Nigerians used cryptocurrencies, the highest proportion of any country in the world.
What’s the problem?
We’ve often discussed the overarching issue of society’s growing trust deficit. That it extends to institutions, according to Skinner (https://thefinanser.com/2023/07/why-cbdcs-fail-a-lack-of-trust-in-authorities), is why live CBDC projects haven’t experienced greater user adoption. In the context of emerging economies, that deficit only widens:
Because Nigerians enjoy trading and make over a million cryptocurrency transactions per month (figures as of 2020)[3][i] but, more than this, many African nations don’t trust governments or government issued currencies. Just look at Zimbabwe as an example or, on a wider horizon, Venezuela. It is why El Salvador and the Central African Republic adopted bitcoin as legal tender.[4] Another reason is that citizens are learning they can move money freely and easily, with no fees or intermediaries, across borders and peer-to-peer, in real-time. These are the major advantages of decentralised money.
Meanwhile, central banks, governments and regulators still try to encourage more adoption of CBDCs. For example, the Jamaican government introduced two incentive programmes in March 2023 to encourage Jamaicans to sign up for their CBDC, the JAM-DEX. Yet, once again, this was in response to disappointing adoption after the launch of JAM-DEX in summer 2022.
For example, once launched, the Jamaican government ran a consumer incentive to reward the first 100,000 Jamaicans who signed up for the JAM-DEX with a J$2,500 (USD$16) deposit. However, only 36,000 people took advantage of the scheme, and so it was extended to people who didn’t have bank accounts and simplified the KYC process. It still didn’t succeed.
These illustrations of centralised versus decentralised currencies clearly delineate between trust in the government and trust in the network. It appears today that, particularly in nations with unstable economies and rife corruption of those who are in power, that the citizens would prefer control of their money through a democratic network than a dictatorial machine.
That trust deficit isn’t just confined to emerging economies. Earlier this week, Presidential hopeful Ron Desantis promised to ban CBDCs if he were to be elected.
Here’s Coindesk (https://www.coindesk.com/policy/2023/07/17/ron-desantis-promises-to-ban-cbdcs-if-elected-president/):
“Done, dead, not happening in this country,” said DeSantis at the Family Leadership Summit in Iowa last Friday. “If I am the president, on day one, we will nix central bank digital currency.”
DeSantis has been an outspoken critic of CDBDs for allowing “government-sanctioned surveillance,” and in March signed a bill to prohibit the use of a national CBDC as money within Florida.
As for the broader subject of crypto, he’s been far more supportive, previously calling its use a question of civil liberty and describing bitcoin (BTC) as a “threat to the current regime.”
Central bank digital currencies, which are a tokenized form of a country’s fiat currency issued by the government, are becoming a growing wedge between political sides in the U.S., with the GOP, broadly speaking, not in favor, and the Democrats so far mostly silent on the subject.
As it stands, the U.S. is currently the odd man out among G7 central banks when it comes to CBDC development. That’s less worrying when you consider that pretty much all relevant stablecoins are denominated in U.S. dollars.
Elsewhere in digital money, here’s Calvin Burrows:
Russia and South Korea announce CBDC plans
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Russia announced they will begin testing a digital Ruble CBDC in August. Russia’s higher legislative body passed a bill that gave legal authority to the CBDC, but President Vladimir Putin still needs to sign it before it becomes official.
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From Decrypt: (https://decrypt.co/149238/russia-to-start-testing-digital-ruble-cbdc-in-august-barring-putins-veto) “Under the bill, Russians will be able to make payments and transfers from their digital wallets that would be within the central bank's platform or one of the partner banks that it will be working with. However, the CBDC can only be used for payments or transfers—not lending or deposits, according to the central bank.”
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South Korea’s central bank published a report (https://t.co/kinzzxnMqT) that said they’re preparing for a future with a CBDC. From Cointelegraph: (https://cointelegraph.com/news/south-korea-central-bank-charts-future-payment-systems-cbdc) “The BOK will step up CBDC research, with plans to look at CBDC-based tokenized deposits and expand the scope of the research with the banks and the clearings institute.”
China gives an update on the digital yuan
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Yi Gang, China’s central bank governor, said the country’s CBDC has been used in $250 billion worth of transactions since it was introduced in January 2022, but circulation and adoption of the digital currency remain low.
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From Cointelegraph: (https://cointelegraph.com/news/china-cbdc-transaction-volume-nears-two-trillion-yuan) “He claimed around $2.3 billion, or 16.5 billion digital yuan, was in circulation at the end of June, which only represents 0.16% of China’s monetary supply, according to a July 19 Reuters report. (https://www.reuters.com/markets/asia/chinas-digital-yuan-transactions-seeing-strong-momentum-says-cbank-gov-yi-2023-07-19/) The digital yuan’s adoption is still minimal relative to China’s 1.4 billion strong population, so far mostly being used for domestic retail payments (https://cointelegraph.com/news/crypto-friendly-dbs-bank-launches-digital-yuan-payment-tool) aside from a few trials in Hong Kong.”
USDC gets a boost
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Bitso (https://bitso.com/), a Latin American crypto firm, announced an integration with the Stellar Network (https://stellar.org/) in an effort to boost international USDC payments.
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From CoinDesk: (https://www.coindesk.com/business/2023/07/19/latin-american-crypto-firm-bitso-joins-stellar-network-to-boost-international-usdc-payments/) “The company said in a statement that it developed a solution in partnership with the Stellar Development Foundation to enable businesses around the world to transact in USDC to Argentina, Colombia and Mexico, where Bitso has a direct connection to local banking systems.”
https://hardyaka.substack.com/p/the-weekend-150the-problem-with-cbdcs
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