The Breakdown - The Race to the First Central Bank Digital Currency

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Monday, April 11th. And today we are doing a little check-in on the state of central bank digital currencies. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it wherever you listen to podcasts, give it a rating, give it a review, or if you want to get deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash

Starting point is 00:00:46 breakdown pod. So I'm doing shows a little bit in advance right now because I'm going to be traveling a bit around this weekend, and I thought it would be useful to do an episode on a topic that is always lurking, just as a kind of gut check about where things are. At this point, I'm sure you are well familiar with Central Bank digital currencies. These are effectively digital fiats. They would be integrated with a country's existing money system, and so while maybe sharing some of the same technology as cryptocurrencies are something very, very different. At a high level, more than 100 countries, according to the Biden administration, are currently experimenting with CBDCs.

Starting point is 00:01:22 The vast majority are in initial research phases, not full-on trials. In fact, only a couple of countries around the world have actually launched their CBDC. In Nigeria, the E-Naira launched on October 25th of last year. Nigeria is a country of 200 million people, with an economy that has a GDP of 375 billion, which is about the same size as Ireland or Israel. Now, there was some weirdness, frankly, around the E Naira launch. It was pitched as allowing, quote, Africa's most populous nation to experience the full benefits of the global digital economy.

Starting point is 00:01:53 But when the launch press conference was happening, the president was heard to ask his central bank governor, so what do we do? While the central bank governor was pointing to the E Naira symbol, and then responding, that is it? So it doesn't seem like everyone's quite on the same page here. The E Naira was intended to reduce the footprint of the cash-based economy in Nigeria and expand the tax base of the country. It was also seemingly to try to cut the rug out from under cryptocurrencies which were becoming increasingly popular in the country and which were subject to some strong language and restrictions from the Nigerian Central Bank. However, there have been some pretty big

Starting point is 00:02:29 issues with the E-Naira. First, it needs mobile data connectivity, whereas other alternative fintech payment systems are able to be used with just mobile text messages. There is still no cross-border payment, meaning that no remittances are being made with the E-Naira. There are spending restrictions on people who have been unable to prove their identity, making this not really a great solution to being for the unbanked. And according to Tech Monitor, quote, almost as soon as it was launched, users complained of poor functionality and the app was briefly withdrawn from the Google Play Store for improvements. At the beginning of March, Economic Confidential wrote four months after launch, major vendors shun E. Naira. In the Caribbean, there are a couple of live projects as well.

Starting point is 00:03:08 Something called DeCash is Live as a part of eight Eastern Caribbean Nations Monetary Union, although it's had a lot of issues. The platform crashed on January of 14th and was only restored after a two-month outage on March 9th. According to Bloomberg, there are only about 4,000 people using the platform, and it's only being accepted by about 120 merchants. In the Bahamas, it sounds like the Sand Dollar Project is going a little bit better, with it being integrated into the existing banking and clearance system as an additional channel rather than a completely parallel and detached system. They're still sort of in a trial phase, but it is live.

Starting point is 00:03:42 In March, the central bank governor, John Roll, said we are that much closer to achieving a seamless ecosystem between the digital and physical versions of the Bahamian currency. After months of beta testing, troubleshooting, and refining the transaction process, we launched this phase with confidence in the integrity of the system we have created. We view the sand dollar as complementary to physical cash in that the Bahamian currency can move between physical and digital spaces without losing any value. So as you can tell, it is still very early days for this given that there's only a couple of places where there's anything resembling a live CBDC. So what now about the big players, the U.S., the EU, and China? All of these countries or regions had kind of two big moments when it comes to the history of CBDCs.

Starting point is 00:04:22 The first was the starting gun effect of when Facebook announced its Libreys, project in 2019, and the second was the acceleration that COVID brought around these efforts. If you remember, the original COVID-19 relief bill had a CBDC in it before that was removed. Let's start with China, though, as they are widely seen as the farthest along. As of January from TechCrunch, 261 million individual users, as opposed to enterprises, which is about one-fifth of the population, have set up the E-CNY wallet. 87.5 billion yuan, which is about 13.78 billion U.S., has been transacted using the digital currency. This is according to official People's Bank of China Notes.

Starting point is 00:05:03 The ECNY wallet is now downloadable in Chinese app stores, but it's only usable in a set of pilot cities. And I thought this was an interesting quote. In terms of its relationship with China's popular payment systems, the PBOC said in its report that ECNY is supposed to complement rather than replace WeChat Pay and AliPay. This is interesting because China spent the better part of the last few years bringing to heal these private sector money companies and bringing them within its sphere of influence. Now, one interesting note from March shows that there are still some legal things to be worked out with the Chinese digital yuan. The president of the PBOC's Nanjing branch has proposed amendments to the administrative law governing Chinese legal tender to consider the digital yuan. The law at this stage does not make clear the relationship between digital and physical yuan.

Starting point is 00:05:48 But as all of this is going on, infrastructure continues to be built out. Union Pay is about to launch a self-service ECNY integration, which is designed to help existing merchants get set up to accept the CBDC in under five minutes. Looking for ways to step up your crypto game? Then go with Nexo. For starters, you get free crypto for each purchase or swap. How about earning guaranteed yields? Up to 17% paid out daily.

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Starting point is 00:07:39 fees. Download the FTCS app today and use referral code breakdown to support the show. Now a question, how has Russia and Ukraine change things, if at all? There was an interesting discussion in Reuters from a former Bank of Japan official. He said, China's rapid progress in developing a digital yuan has alarmed some lawmakers in G7 advanced economies as a potential threat against the U.S. dollar's global hegemony. There's a chance a country like China could promote usage of digital yuan for cross-border transactions and create a currency block to counter the dollar's dominance. End quote. That idea of a new currency block is obviously something that people are thinking a lot about right now, as relates to the dollar, the ruble, the Chinese

Starting point is 00:08:19 currency, etc. What now about the European Central Bank? As you've heard in a few different shows, we've seen an acceleration in tone around digital asset regulation, have we seen the same thing around a digital euro? The answer is sort of. On March 11, Coin desk wrote, ECB's Lagarde supports acceleration of digital euro work. This was during an ECB press conference and referred to the ECB's two-year investigation into a digital euro that started last October. Lagarde said, I think we have to be a little bit ahead of the curve if we can on that front, so I hope we can accelerate the work. Also, like in China, the Russian-Ukraine War created a new context, again from CoinDesk on March 31st. Small digital euro payments won't need laundering checks, ECB official says. The article writes, a potential new digital euro would allow

Starting point is 00:09:03 anonymous transactions for small payments in spite of anti-money laundering norms, a leading member of the European Central Bank said. The suggestion stands in contrast to propose rules for private cryptocurrencies like Bitcoin, where lawmakers are debating a plan to outlaw privacy for even low-value transactions. You really don't love to see it. What about the U.S.? Well, there has been a lot going on over here as well. In early February, the Boston Fed released its discussion paper regarding the U.S. CBDC design codenamed Project Hamilton. And then in March, the White House released the long-awaited executive order on cryptocurrencies that included a call for governments to, quote, explore a U.S. Central Bank digital currency in the event that issuance is deemed in the national interest.

Starting point is 00:09:43 Now, much more than previous documents and statements, this executive order made the administration's intention to pursue a digital currency clear, whereas the Fed has hedged in the past, this document did not. One of the six bullets on the summary fact sheet was, quote, explore a U.S. Central Bank digital currency, by placing urgency on research and development of a potential United States CBDC should issuance be deemed in the national interest. The order directs the U.S. government to assess the technological infrastructure and capacity needs for a potential U.S. CBDC in a manner that protects American interests. The order also encourages the Federal Reserve to continue its research, development, and assessment

Starting point is 00:10:18 efforts for a U.S. CBDC, including development of a plan for broader U.S. government action, in support of their work. This effort prioritizes U.S. participation in multi-country experimentation and ensures U.S. leadership internationally to promote CBDC development that is consistent with U.S. priorities and democratic values. Now, while the EO was greeted largely with enthusiasm in the cryptocurrency industry, particularly around the productive tone as it related to digital assets as a whole, there was some concern, especially from the crypto-aligned part of Congress and the Senate on the CBDC provisions. On March 30th, Congressman Tom Emmer tweeted the U.S. not, quote, behind China on crypto. CBDCs are not crypto. They're a government surveillance tool.

Starting point is 00:10:58 Crypto creates freedom. It doesn't destroy it. Remember, earlier in the year, Emmer had introduced legislation that would prevent unilateral fed control of a U.S. digital currency. In a statement at that time, Emmer said, as other countries like China develop CBDCs that fundamentally omit the benefits and protections of cash, it is more important than ever to ensure the United States digital currency policy protects financial privacy, maintains the dollar's dominance, and cultivates innovation. CBDCs that fail to adhere to these three basic principles could enable an entity like the Federal Reserve to mobilize itself into a retail bank, connect personally identifiable information on users, and track their transactions indefinitely. Not only with this CBDC model

Starting point is 00:11:34 centralized Americans' financial information, leaving it vulnerable to attack, but it could also be used as a surveillance tool that Americans should never tolerate from their own government. Senator Ted Cruz also just released something very similar in the Senate. Meanwhile, on the other side of the aisle, Warren has come out in favor of a central bank digital currency. So seemingly some partisanship growing, but don't let that fool you as it's not that simple. There is another entire type of CBDC bill in the e-cash bill. It was introduced in the House by Stephen Lynch, the chair of the House Financial Services Committee's Fintech Task Force. This is basically a CBDC without the central bank. The act would instruct the Treasury, not the Fed, to lead a pilot program to test the digital dollar safety, functionality, and

Starting point is 00:12:17 interoperability with other payment systems and financial institutions. This would be something that would be on cards, on mobile wallets. It would have a physical dimension. According to a press release, the bill mandates that the e-cash includes features, quote, generally associated with the use of physical currency, including anonymity, privacy, and minimal generation of data from transactions. Not only that, but the digital dollar must also work for peer-to-peer payments offline and be stored on hardware devices that are, quote, distributed directly to the public. I think it's clear that there is going to be a much bigger debate around not just central bank digital currencies in the U.S., but cash and monetary privacy more broadly, and it's a conversation we sorely need to have.

Starting point is 00:12:57 So I think it's safe to say that we are nudging towards the CBDC era. It is not fully here yet. You don't have any of the great economies with the CBDC up and running, although China's certainly getting close. This conversation about CBDCs is going to shape discussions of stablecoins and crypto regulation more broadly. And frankly, I think it's a good thing that we're making financial privacy such an issue now. But with that, I want to say thanks again to my sponsors, nexus.io, Arculus and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the Decentralized World this June 9th through the 12th in Austin, Texas. This is the only festival

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The Breakdown - The Race to the First Central Bank Digital Currency

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