CBDC: a solution in search of a problem
The topic of CBDC has so far raised more interest in communications of all kinds than it has completed payments. Today in Trustech, EESTEL – the European Experts in Security of Electronic Transactions – was running a complete session revolving around CBDCs, Central Bank Digital Currencies.
They demonstrated how CBDC were having advantages compared to other cryptocurrencies: they can be as stable as stablecoins as they are issued by a central bank, thus providing trust and stability. The globally accepted goal of retail CBDCs is to replace cash in most, if not in all, of its use ages.
A very large community of researchers, engineers and strategists have been involved in defining CBDCs for years and have published tons of literature about them. More than 80% of central banks are investigating, testing or even launching CBDCs. Already 11 countries including Nigeria and others have rolled out CBDCs. Nigeria eNaira is run by the Central Bank of Nigeria (CBN), which has made a lot of efforts in promoting it, leading to 13 million eNaira wallets in March 2023, according to Coindesk. However, the project has not met the expected success, as many users consider its use is not straightforward, and the country has a huge informal economy that thrives on cash.
Another major experiment in cryptocurrencies is the Chinese digital Yuan, issued by the People’s Bank of China (PBOC) and valued the same as the standard renminbi (RMB). Supporters of the project say transactions are completed instantaneously and at lower costs because intermediaries, namely commercial banks, are not required to participate in the exchange. PBOC has run extensive pilots, involving tens of millions of users in Shenzhen, Suzhou, Xiongan, Chengdu, Chongqing and Guangzhou. In January 2022, PBOC published a report stating that 261 million people had set up a digital yuan wallet, which may sound impressive, but remains small in front of the more than 900 million users of mobile payments, says US-based Foreign Policy Research Institute.
European authorities are promoting actively the digital Euro, specifications are written, projects are launched, pilots are under way, etc. But some obstacles remain to be ironed out. To reach the public, the digital Euro will need the collaboration of commercial banks; this means it will require them to develop actions that will get in direct competition with their payment business and threaten their seigniorage, the difference in interest between what they borrow and what they lend. Also, while the digital Euro will be free to use for holders of the wallet, transaction fees will be levied on merchants. Let's not forget the target of CBDCs is to displace cash, which is seen as free for all. In addition, one of principles set up by the ECB (European Central Bank) is that one should be able to complete offline transactions, something which is easy with banknotes but poses some issues for digital systems: solutions can be found thanks to secure elements, but they represent a cost and also set up obstacles on the way of a simple payment. Finally, while privacy may be guaranteed in a CBDC system, the way it is set up will be easy to understand only for a minority and many may use the alleged threat on privacy to deter people from adopting the technology.
One may remember "you can lead a horse to water, but you can't make him drink." CBDCs sound as the dream of both central banks in search for legitimacy and sovereignty and creative engineers. Demand from the public is harder to figure out. And reluctance from the established banking and merchant communities may be able to crash the project.