CBDCs

How CBDCs are distributed to end users:

1. Direct Model:

The central bank directly issues the CBDC and handles all services, including customer-facing operations.

Example: The People's Bank of China’s Digital Renminbi (pilot phase).

2. Intermediated Model:

The central bank issues the CBDC, but customer-facing services are managed by intermediaries (e.g., commercial banks or approved payment providers).

Example: Eastern Caribbean Union's Dcash and conceptual models explored by the U.S. Federal Reserve.

The technical framework for CBDC functionality:

1. Account-Based:

Ownership is tied to identities.

Transactions are validated by verifying account holders' identities.

Example: European Central Bank’s Digital Euro (research phase).

2. Token-Based:

Ownership is tied to cryptographic proofs.

Transactions rely on the possession of digital tokens, similar to cryptocurrencies.

3. Database Management:

May use centralized systems or distributed ledger technology (DLT).

Not all CBDCs are blockchain-based. Some rely on traditional databases for secure record-keeping.

Centralized Control:

Unlike decentralized cryptocurrencies, CBDCs are under the full authority of central banks.

Flexible Technology:

Can use blockchain, distributed ledger technology, or centralized databases.

Qualities of Money:

Serve as a unit of account, medium of exchange, and store of value.

Traceability:

Each unit is uniquely identifiable, enhancing transparency and reducing fraud.

1. Early Research:

1990s: Finland’s Avant, an early electronic money (e-money) card, laid the foundation.

2. Key Milestones:

2014: The People's Bank of China began researching CBDCs.

2014–2018: Ecuador launched a state-run mobile payment system (not blockchain-based).

2021: Australia's Central Bank tokenized syndicated loans using Ethereum in a wholesale CBDC proof of concept.

2023: Over 134 countries, representing about 98% of global GDP, explored CBDC frameworks.

2024: Several CBDCs have been launched globally.

Examples of Launched CBDCs

1. Bahamas – Sand Dollar:

The first fully launched CBDC in the world.

2. Eastern Caribbean Union – Dcash:

Used within member states for cross-border and local transactions.

3. Nigeria – eNaira:

Africa’s first CBDC, focused on financial inclusion.

4. China – Digital Renminbi:

The first CBDC by a major economy, currently in extensive pilot testing.

5. India – Digital Rupee:

Pilot phase for retail and wholesale use.

6. Jamaica – Jam-Dex:

Launched to increase digital payment adoption.

7. Russia – Digital Ruble:

In testing for domestic use and trade.

8. Brazil – Drex:

Testing began in 2023.

9. Eurozone – Digital Euro:

Approved for a preparatory phase starting October 2024.

Other Government-Backed Digital Currencies

Venezuela – Petro:

A government-issued cryptocurrency designed to bypass economic sanctions.

Distinct from CBDCs due to its reliance on blockchain.

Marshall Islands – Sovereign (SOV):

Proposed as a national digital currency but still under development.

1. Enhanced financial inclusion by providing digital payment options to the unbanked.

2. Increased efficiency in cross-border payments.

3. Improved monetary policy implementation.

4. Enhanced traceability to combat fraud and tax evasion.

1. Potential privacy concerns due to centralized control and traceability.

2. Risk of cyberattacks on CBDC systems.

3. High implementation and operational costs.

4. Potential disruption to traditional banking systems, especially with a direct distribution model.

1. Digital Dollarization:

This refers to the adoption of foreign digital currencies like the U.S. digital dollar by local economies.

While it can stabilize local economies, it may lead to a loss of monetary sovereignty and control over domestic financial policies.

2. Helicopter Money:

The direct distribution of stimulus funds to citizens' wallets by the central authority, bypassing financial intermediaries.

This boosts spending immediately during recessions but could lead to inflationary pressure if not managed carefully.

3. Seigniorage:

The profit earned by a government from issuing currency, calculated as the difference between the face value of the money and its production cost.

CBDCs help central banks retain this profit by preventing private digital currencies from eroding their revenue sources.

4. Zero Lower Bound:

A situation in monetary policy where interest rates are close to zero, making traditional monetary tools ineffective.

5. Traceability:

CBDCs enable the tracking of the origins and uses of money through unique identifiers, ensuring transparency and accountability.

1. China:

China leads the CBDC race with its digital yuan.

It aims to enhance its payment system, reduce dependency on private platforms like Alipay and WeChat Pay, and boost the internationalization of the yuan.

Extensive pilot programs have been conducted in cities like Shenzhen and Suzhou, and the digital yuan was integrated with the Winter Olympics in 2022.

The UK is exploring a digital pound, nicknamed "Britcoin," as part of its efforts to modernize its monetary system.

The digital pound, nicknamed Britcoin, is being developed to complement physical cash as the UK moves toward a society driven by digital payments.

The goal is to strengthen the UK's position as a financial leader in innovation. While the digital pound was initially expected to launch in the late 2020s, it’s been years since that announcement, and progress remains unclear.

Now, moving to Nigeria, we launched the e-Naira in 2021.

The aim was to promote financial inclusion, especially in underserved and unbanked areas, and to reduce cash handling costs, driving Nigeria toward a more digital economy.

However, the adoption rate has been limited due to low digital literacy and trust issues. Nigerians generally have trust issues—myself included.

I mean, trusting someone with my hard-earned money is not easy. But we hope things improve over time.

In the European Union, preparation for the digital euro began in 2023.

The EU aims to ensure monetary sovereignty in the digital age and to provide an alternative to non-European payment providers like Visa and MasterCard.

India, one of the most crypto-adoptive nations, launched its pilot project for the digital rupee in 2022.

Through this initiative, India seeks to support innovation in digital payments, enhance efficiency in interbank settlements, and improve wholesale financial transactions.

On the other hand, some countries remain neutral or skeptical about CBDCs. For instance:

Switzerland prioritizes the relevance of physical cash due to concerns about increased financial surveillance.

For them, cash is viewed as a fundamental aspect of individual liberty.

The United States is cautious about adopting a digital dollar.

While the Federal Reserve is exploring it, the U.S. government wants to balance innovation with privacy and security concerns.

Additionally, they worry about potential threats to banking stability from deposit outflows.

Sweden is testing the e-krona.

Despite being highly cashless and digital, the country remains cautious about fully transitioning to a CBDC due to concerns about reliability and inclusivity.

Interestingly, El Salvador has taken a different path. Instead of prioritizing a CBDC, El Salvador has embraced Bitcoin, becoming the first country to adopt it as legal tender.

Their dedication to Bitcoin is admirable, especially given the cryptocurrency's volatility.

Despite the risks, El Salvador is thriving, firmly believing in a decentralized system rather than state-controlled digital currencies.

Honestly, El Salvador fascinates me.

It’s a country I would love to visit someday—maybe I’ll find a sponsor or something.

Sweden also holds a special place in my heart, and visiting there is another dream of mine.

I'd you stayed till here, Thank you so much.

Dyor?

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