Central banks advance with CBDC development

Three central banks this week concluded a joint project in which they produced a proof-of-concept for how central bank digital currency (CBDC) can be used for cross-border payments.

A central bank digital currency (CBDC) is a digital currency issued and governed by a central bank. In the case of the United States, a CBDC would be a digital currency issued and controlled directly by the Federal Reserve. 

CBDC is like cash in that it is backed by the Fed and its value is manipulated by the Fed’s monetary policies. However, whereas cash transactions are anonymous, CBDC transactions are not, as confirmed by Federal Reserve Chairman Jerome Powell.  

While on paper, CBDC has the potential to maximize payment efficiency, it also has far-reaching implications about the government’s involvement in private citizens' transactions. During a lockdown, for example, a government may be able to see if a citizen broke the rules by trying to make a purchase and where the purchase attempt was made. The government could in some cases restrict use of digital funds altogether. 

Israel, Norway and Sweden

The Bank of Israel, Central Bank of Norway and Sveriges Riksbank, Sweden’s central bank, announced this week that they have completed Project Icebreaker, an initiative they began last year to create and test how CBDCs can be used for cross-border and cross-currency payments.

The central banks were assisted by Swiss tech firm BIS Innovation Hub Nordic Centre. 

“Project Icebreaker is unique in its proposition. It first allows central banks to have almost full autonomy in designing a domestic retail CBDC. Then it provides a model for that same CBDC to be used for international payments,” explained BIS Innovation Hub Innovation Head Cecilia Skingsley.

Bank of Israel Deputy Governor Andrew Abir said that “the learnings from this successful project have been very important for us and for the central banking community.”

United States

Last month, the US Treasury Department began assembling a team of senior officials from the Treasury Department, the Federal Reserve, the National Security Council and other government agencies to explore the creation of a CBDC. The step is in keeping with an Executive Order signed by Joe Biden in March 2022 which tasked his cabinet and various federal agencies with developing a framework for a CBDC and submitting related proposals.  

According to an analysis from the Cato Institute in July, 71% of public comments on a Federal Reserve discussion paper about CBDC were opposed to it with most citing financial privacy, financial oppression, and the risk of disintermediation as main concerns.

Nevertheless, the White House in September directed government agencies and the Federal Reserve Bank to explore the technology needed to implement a CBDC. In its “First-Ever Comprehensive Framework for Responsible Development of Digital Assets,” the Biden administration stated that digital assets, such as decentralized cryptocurrency which is not under government control, “pose real risks". The regime, however, will step in to “protect consumers, investors, businesses, financial stability, national security and the environment” by regulating digital assets.  

The Biden administration even plans to launch a propaganda campaign against digital assets. 

“The Financial Literacy Education Commission (FLEC) will lead public-awareness efforts to help consumers understand the risks involved with digital assets, identify common fraudulent practices, and learn how to report misconduct,” read the Fact Sheet. 

The White House also tasked the Department of Commerce with “establishing a standing forum to convene federal agencies, industry, academics, and civil society” to regulate digital assets. 

“Together, these recommendations comprise the first, ‘whole-of-government approach’ to regulating the industry,” crowed CNBC. 

The White House made a point of listing the benefits of a CBDC, which include the government’s ability to control it. 

“A potential U.S. CBDC could also help preserve U.S. global financial leadership, and support the effectiveness of sanctions. But a CBDC could also have unintended consequences, including runs to CBDC in times of stress.” 

The Fact Sheet said that “further research and development on the technology that would support a U.S. CBDC is needed,” and directed the “leadership of the Federal Reserve, the National Economic Council, the National Security Council, the Office of Science and Technology Policy, and the Treasury Department” to “meet regularly” to discuss their progress on creating and implementing a CBDC. 

Senator Ted Cruz (R-TX) slammed the government's “framework” and move toward a CBDC.

“Biden just released his crypto reg ‘framework’ encouraging the Fed to keep developing a CBDC, which the Fed Chair admits would destroy cryptocurrencies,” tweeted Cruz. “A CBDC would allow the gov to spy on us. Congress needs to pass my bill that stops the Fed from developing a CBDC now!”

Australia

Last month, the Reserve Bank of Australia announced it has selected 14 use cases for CBDC testing. The central bank will explore how a CBDC can be used for offline payments, nature-based asset trading, corporate bond and tokenized foreign exchange settlement, CBDC custodial models and high-quality liquid assets securities trading, as well as other use cases.

Japan

The Bank of Japan will begin testing its own CBDC in April after completing its proof-of-concept phase this month. Since October the Japanese Credit Bureau (JCB) has been building its own digital currency to simulate how people would be able to pay at restaurants with CBDC using credit cards. The company said that while it is currently using touch payments, JCB is working on providing mobile solutions for CBDC where users can pay via mobile app and even QR codes. 

Europe

The European Central Bank has partnered with 30 Spanish banks to develop a CBDC prototype and has already selected five corporations — including Amazon — to participate in trials.

Nigeria

One country, however, is experiencing unexpected difficulty in rolling out a CBDC.

Nigerians are taking to the streets in protest to demand a return to cash after the government began forcing its CBDC on citizens. 

The country’s central bank debuted Africa’s first CBDC in late 2021 but the digital currency was given a cold reception as less than 0.5% of Nigerians used it. To try coaxing citizens into adopting CBDC the Nigerian government removed restrictions that required bank accounts to use CBDC. When that didn’t work the government offered discounts on cab fares if riders used CBDC to pay.

When neither of those worked the Nigerian government launched a war on cash and restricted cash withdrawals to 100,000 naira ($225) per week for individuals and 500,000 naira ($1,123) for businesses. At the same time, the government also decided to redesign the currency, which limited banks’ cash reserves while they waited for the newly designed currency.

Nigerians have reportedly erupted in protest over the cash restrictions, but the government is doubling down. Central Bank of Nigeria Governor Godwin Emefiele said, “The destination, as far as I am concerned, is to achieve a 100% cashless economy in Nigeria.”

Israel is looking to follow in the Nigerian government's footsteps as far as phasing out cash.

As reported by Frontline News, Israel has already begun restricting cash transactions and even the amount of cash an Israeli citizen can keep at home. 

While the State of Israel mentions money laundering and tax evasion as justifications for these laws, they are not the only factors. The government also aims to control how citizens spend their money and ultimately phase out cash altogether, allowing only digital payments. 

“The Law for the Reduction in the Use of Cash was designed to change the public’s consumption habits and encourage a switch to digital means of payment, with a view to almost complete replacement of the use of cash in the future,” reports Globes.