Digital Currencies in Central Banking The “Sputnik” Moment
Why CBDC: Digital Payments?
- Tax payment and transaction data can be automatically paid to the tax authority
- Merchant can immediately receive payment in their digital account
- Data records about transactions are automatically submitted to the merchant’s bank, customer’s bank
Being in the 21st century the only part of the Internet that has not caught up with innovation is the ability for individuals and entities to exchange payments for goods and services without a 3rd party and this problem has now been solved by the Bitcoin blockchain. Now digital distributed payments can be implemented in more cost effective, secure, and innovative way that was not possible before.
Governments around the world are trying to improve their services and provide more attractive environments to do business.
Smart POS
Provide the following benefits:
- Direct Tax Collection
- Direct Reporting to Central Bank
- Direct reporting to Treasury
- Multiple Settlement per Transaction
- Credit/Debit Card MSR, IC Readers
- Real-time sales monitoring & data centralization
- All-in-One POS Terminal, QR-code, scanner; NFC
- Customizable
- Portable
- Camera / Scanner Fingerprint
Digital Settlement Payments Benefits
Digital Settlement Payments provide significant benefits to the economy in the following way:
- Free Movement of Capital
Free movement of capital is to say that individuals should have the freedom to move their capital beyond borders with least amount of friction and “red-tape” while abiding to regulation and local and regional laws.
- Reduced Transaction Costs
Costs can be reduced by using more secure innovative ways of providing the transfer of transactions between individuals and organizations in real-time.
- Faster and Convenient Transfers
Users will benefit of innovative ways to safeguard transactions while making them safe, secure and more private plus provide convenient ways to manage their assets and money.
- Improved Revenue Government Administration
This innovation will bring improved revenue administration systems for the Government in relations to the enforcement of systems that the Government relies upon for tax collection and in particular more data sets to analyze and better guide evidence-based policy making.
- Reduction in Legacy Cash Usage
Given the fact that most governments around the world are trying to mitigate and eliminate money laundering by reducing and even terminating legacy cash usage and also the enhancement of AML/CFT to improve correspondent banking relationships, legacy cash usage has been at the forefront. CBDC provides a path forward to address the above.
- Digital (Decentralized) Finance Network Effect (DeFi)
Another benefit is the introduction of “Smart Money” or the ability to provide logic to transaction in real-time as they are executed. And these transactions are not reserved for money transactions but any financial transaction. Defi brings a reduction in bureaucracy and a huge increase in trust-minimized software. Even though Fintech will still be at the initial phase of deployment given the proprietary aspects, with time it will better prepare societies to embrace this inevitable change.
- Improved Financial Inclusion
According to the World Bank, nearly 2 billion people worldwide are unbanked. With the current centralized, bureaucratic and inefficient banking system the unbanked will stay unbanked. CBDC will bring more citizens and residents to become banked and be able to use more financial tools and services that have until now benefited only a privileged few.
Why Blockchain?
- Persistent Immutability
Having records and data decentralized and deployed on a blockchain, makes it virtually impossible for any one party to tamper with data or records.
- Security
To get the full picture, hackers will need to hack not just the current block in the blockchain or distributed ledger, but also every block before it. This is not only technically almost impossible, but it is costly, thereby reducing the incentive for malicious activities.
- Redundancy (DLT) Distributed Ledger Technology
DLT is basically a synchronized and shared trusted, via consensus, database that is distributed across multiple sites, institutions and geographies.
- Overhead/Cost Reduction with the use of Smart Contracts or Programmable money with distributed consensus
Given the feature of being “programmable money” it eliminates costs by removing manual human intervention bringing speed and efficiency to transaction and at the same time improving security and privacy.
- Transparency/Accountability (Censorship resistant)
A duty of transparency for public officials, civil servants, managers and directors of companies and organizations and board trustees should be demanded by stockholders. It is imperative that public officials, civil servants, managers and directors of companies and organizations and board trustees are accountable for their actions and that there will be consequences when duties and commitments are not met. Depending on the DLT implementation (permissionless or permissioned) this can be accomplished and enforced in a highly efficient way.
Permissionless & Permissioned Blockchain
- Permissionless no 3rd party characteristics
Censor resistance (no oppression), Immutability (no fraud), Accountability (no cheating), Transparency (no lies), Openness (no barriers), Global (no borders), Trust-less (no laws only laws of mathematics), Deflation (no inflation, scarcity), Decentralization (no centralization)
- Permissioned federation
Censor resistance (outside the federation), Immutability (no fraud, only as strong as federation), Accountability (regulated federation), Transparency (provided by federation), Openness (permitted by federation), Global (stipulated by federation), Civilian Rule of Law, Inflationary, Centralized (Complete Central Control)
CBDC Migration Path
First Step
Replace SWIFT with Central Bank Digital Currency (CBDC). SWIFT is The Society for Worldwide Interbank Financial Telecommunication and provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment, founded in 1973. This system is archaic and behind the times. Some approaches called real-time payment (RTP) schemes are being implemented, but these systems still require centralized managed databases requiring similar resources as we have today.
Second Step
Update/replace the automated clearing house (ACH) transaction batch system, real-time gross settlement (RTGS) transfer systems where the transfer of money takes place from one bank to any other bank on a “real time” meaning payment transactions being settled as soon as they are processed which could take hours or days. Single Euro Payments Area (SEPA) is a payment-integration initiative of the European Union for simplification of bank transfers denominated in euro similar to ACH. Again these systems have been around for years and reflect a 25 year old technology or batching and innovation of the 1990s. The idea is to replace or augment it with CBDC distributed ledger technology.
Third Step
Hand over responsibility to distribute this new CBDC fiat currency to commercial banks or Digital Cash Account Providers (DCAP). Central banks will be responsible and have control of issuing CBDC and cash and distributing it to commercial banks including providing white-label standard guidance for commercial banks to use, and finally commercial banks will have the responsibility of applying the standards and protocols provided by the central bank and to distribute the new CBDC and cash. Basically the wholesale retail ecosystem form of fiat national digital currency.
Example
Where this Innovation is Moving is basically a Central Bank Digital Currency (CBDC), “Stable Coins” for the nation state.
In Latin America, a catalyst would be Libra, positioned with its 2.4bn active users is a main catalyst and incentive for financial institutions specially the central banks to provide the regulated and controlled digital fiat Libra is providing due to market demand that the central banks are not providing.
Finally, CBDC would have to force legal tender status. This would drive interoperability where fragmented electronic payment methods coexist each with their own digital IOUs backed simply by a promise to pay.
To conclude Digital Currencies in Central Banking has become the “Sputnik” moment as it was in the 1960 space race. Central banks are now realizing the crucial role they have with their main tasks as central banks but with an innovative way to serve their stakeholders in a global competitive way.
- Conduct monetary policy in an innovative globally competitive way
- Supervise banking and credit institutions with a less bureaucratic process using technology to reduce cost and increase speed of execution
- Issue paper money (cash) and CBDC as legal tender for national use
- Manage the foreign exchange reserves using new innovative DLT like Digital Settlement Networks or Stable Coins pegged to global reserve currencies like the US dollar
- Act as the government’s treasurer by receiving and making payments from and to the public; using DLT and CBDC innovations
- Advise the governments on financial and economic matters, including standards and protocols being used globally in relation to CBDC and DLTs.
Government Leaders will be the only ones to take advantage of this historic opportunity just like the Internet did for global communication. If not, whole nations will be left behind in this exponentially changing global landscape.
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