HNewsWire- As a barrage of Western sanctions wreaks havoc on Russia's economy, some are pondering new strategies to circumvent future US economic penalties. Central bank digital currency (CBDC) networks, according to Lewis McLellan, the digital editor of the Official Monetary and Financial Institutions Forum's (OMFIF) Digital Monetary Institute, are one prospective tool for defanging future penalties:
Networks of cross-border central bank digital currencies are being created throughout Asia (like the mCBDC Bridge, which involves Thailand, Hong Kong, China and the United Arab Emirates). Russia's central bank is working on a digital rouble, and Governor Elvira Nabiullina has shown interest in the currency's ability to facilitate cross-border transactions, particularly with China.
A big and unexpected new change might soon influence the fortunes of thousands, leaving the bulk of people worse off than before. Further Information
In addition, the digital yuan may be put to use. It is well-known across China and is likely to be accepted by anybody with costs or duties in the nation. Dollar stablecoins, which are growing in popularity and scale, might form the backbone of a payments network that cannot be shut down by limiting access to Swift or the Federal Reserve's clearing system. There is no evidence that China intends to aid Russian businesses in dodging sanctions — and if they do, they will almost definitely face their own — but if the dollar payments network becomes a tool of foreign policy, it provides a renewed sense of urgency for some to construct an alternative.
Beijing Increases the Number of People Who Can Test Their Yuan
The digital renminbi is the first CBDC issued by the central bank of a major country, and it has been publicly tested since April 2021. So far, CBDC testing has been undertaken in eleven cities and locations in China (Shenzhen, Suzhou, Chengdu, Xiong'an, Shanghai, Hainan, Changsha, Xian, Qingdao, and Dalian). According to the Chinese state-owned financial news outlet Securities Times, Beijing is on the verge of testing its digital yuan currency in a third group of cities and provinces, including Henan, Fujian, and Heilongjiang, as well as Guangzhou, Chongqing, Fuzhou, and Xiamen.
China's central bank has been researching the potential posed by digital currency since 2014. Lower operational costs, more efficiency, and "a wide range of inventive applications" are among the possibilities, according to Fan Yifei, a PBOC deputy governor in 2016. The People's Republic of China's State Council authorized the development of the digital RMB a year later. Commercial banks, as well as Chinese technological behemoths Tencent, Alibaba, Huawei, JD.com, and UnionPay, were invited to participate.
Former IMF official Josh Lipsky, who now works at the Atlantic Council, a major US think tank, has recognized the digital yuan as a "national security concern" undermining the US currency. However, when it comes to experimenting with or testing a digital currency update, the People's Bank of China is not an exception.
The Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England are among the 87 central banks that presently operate in nations accounting for 90 percent of global GDP. The Reserve Bank of India has said that it would adopt a digital rupee in the next fiscal year (April 2022 to March 2023). According to the technology news website Tech Monitor, three CBDCs have formally debuted in the previous two years: the so-called DCash in the Eastern Caribbean, the Sand Dollar in the Bahamas, and the eNaira in Nigeria, all of which have had a very limited impact so far.
Customers complained about the app's lack of functionality very soon after its release, and the app was temporarily pulled from the Google Play Store to enable for revisions. As of January, just 694,000 eNaira wallets have been downloaded (the e-Yuan, by contrast, remains in its pilot stage but boasts some 260 million users). Spending was likewise kept to a minimum, with transactions totaling $450,000.
IMF Consistently present
The International Monetary Fund (IMF), as one would expect from the world's most powerful supranational financial institution, is heavily involved in this process, most notably through providing technical assistance to a number of its members. Speaking at an Atlantic Council event last month, IMF President Kristalina Georgieva stressed the potential benefits of CBDCs while lauding central banks' "ingenuity":
We have moved beyond theoretical discussions regarding CBDCs and are now in the experimental stage. Central banks are wearing aprons and delving into the bits and bytes of digital currency.
CBDCs are still in their infancy, and no one knows how far or how fast they will go. What we do know is that central banks are beefing up their abilities to use new technology in order to be ready for whatever comes next.
CBDCs, if built appropriately, have the potential to be more resilient, secure, available, and cost-effective than private forms of digital money. That is especially true when compared to unbacked crypto assets, which are notoriously volatile. Furthermore, even the best-managed and supervised stablecoins may fall short of the stability and design of a central bank digital currency.
Because of the ingenuity of Central Banks, we know that the move to CBDCs is gaining momentum.
CBDCs are presently being studied in over 100 countries to some extent. Some are undertaking research, some are testing, and a few are actually administering CBDC to the general public.
The Sand Dollar, the local CBDC, has been in circulation for more than a year in the Bahamas.
Riksbank in Sweden has created a proof of concept for CBDC and is researching its technical and policy implications.
The digital renminbi [called e-CNY] is becoming more popular in China, with over a hundred million users and billions of yuan in transactions.
And, just last month, the Federal Reserve produced a report in which it said that "a CBDC has the potential to fundamentally change the structure of the United States financial system."
As could be anticipated, the IMF is deeply involved in this issue, providing technical assistance to a number of its members. The Fund's primary goal is to allow experience exchange and to promote CBDC interoperability.
Approximately 90 central banks are either experimenting with or are currently testing central bank digital currencies (CBDCs). That is a sizable component in a globe of just over 190 nations, but considering that they include the European Central Bank (ECB), which alone represents 19 Eurozone economies, the real number of economies engaged is well over 100. They include all G20 economies and account for more than 90% of global GDP.
In the last two years, three CBDCs have gone fully operational: the so-called DCash in the Eastern Caribbean, the Sand Dollar in the Bahamas, and the eNaira in Nigeria. The International Monetary Fund, the world's most powerful supranational financial organization, has been assisting in the implementation of CBDCs. In a recent address, Fund President Kristalina Georgieva extolled the potential advantages (on which more later) of CBDCs while praising the "ingenuity" of the central banks frantically attempting to bring them into being.
BlackRock, the world's biggest asset manager, is also on board, assisting several of the world's top central banks, including the Federal Reserve and the European Central Bank, in managing their assets while avoiding any possible conflicts of interest. During the Spring 2020 market collapse, the fund was the greatest recipient of the Federal Reserve's rescue of exchange-traded funds.
Larry Fink, CEO of BlackRock, said in his most recent letter to investors that the Ukrainian war has the potential to accelerate the growth of digital currencies throughout the globe.
"The Russian invasion of Ukraine has effectively ended the three decades of globalization that we have seen." As a consequence, reorienting supply chains on a big scale will necessarily be inflationary...
"The battle will force nations to reconsider their reliance on foreign currencies." Even before the conflict, numerous countries were attempting to take a more active role in digital currencies and establish the legislative frameworks within which they function...
A well-designed global digital payment system may improve international transaction settlement while lowering the danger of money laundering and corruption. Digital currencies may also assist to reduce the cost of cross-border transfers, such as when expatriate employees send money home to their family."
The Bank for International Settlements published the results of a study it conducted with four central banks — the Reserve Bank of Australia, Bank Negara Malaysia, the Monetary Authority of Singapore, and the South African Reserve Bank — into the practical challenges of executing cross-border payments between different central bank digital currencies on Tuesday (March 22). While significant obstacles remain, the research suggests that financial institutions might utilize CBDCs issued by participating central banks to deal directly with one another on a common platform:
The Bank for International Settlements (BIS) Innovation Hub, the Reserve Bank of Australia, Bank Negara Malaysia, the Singapore Monetary Authority, and the South African Reserve Bank announced today the completion of prototypes for a common platform enabling international settlements using multiple central bank digital currencies (CBDCs).
Project Dunbar, led by the Innovation Hub's Singapore Centre, demonstrated that financial institutions may utilize CBDCs issued by participating central banks to interact directly with one another on a common platform. This has the potential to eliminate the need for intermediaries and, as a result, the costs and time required to complete cross-border transactions.
The project was divided into three workstreams: one focused on high-level functional requirements and design, and two parallel technical streams that created prototypes on various technology platforms (Corda and Partior).
Three crucial issues were highlighted throughout the project: which companies should be permitted to possess and interact with CBDCs issued on the platform? How can the flow of cross-border payments be made easier while yet respecting regulatory variations across jurisdictions? What governance mechanisms might provide nations with the confidence they need to share key national infrastructure, such as a payment system?
The project suggested realistic solutions to these difficulties, which were proven via the creation of prototypes demonstrating the technological feasibility of shared multi-CBDC platforms for international settlements.
The experimental CBDC program's results might aid in the adoption of CBDC international settlement for G-20 states, albeit given the developing geopolitical fractures in the so-called "international rules-based order," it is unclear whether countries would be ready to participate in such a fashion.
China has already created its own digital yuan, which is being tested in over a dozen cities and regions. It has also been testing its cross-border capability. This has sparked fears in the West that the United States' "financial leadership" is under threat, fears that have been exacerbated by the way US and EU sanctions against Russia, particularly the confiscation of a large portion of Russia's foreign currency reserves, have backfired, encouraging not only Russia but many other countries around the world to seek an alternative cross-border payment system.
At the same time, the United States is committed to maintain its leadership position in the new global financial architecture. To that end, it has put together a tentative consortium of "seven of the largest Western-aligned central banks, led in practice by the US Federal Reserve and the European Central Bank... aimed at creating a system of 'interoperable' CBDCs," writes Washington DC-based blogger and analyst NS Lyons in his article, Just Say No to CBDCs.
But what exactly are CBDCs? How will they function? What may they be used for? What impact may they have on the general populace of the nations where they are introduced? Here's an extract from "Just Say No to CBDCs" to address the first two questions:
You may believe that you already use "digital money" on a daily basis if you seldom use actual cash and instead pay for practically everything with a credit card or a digital payment app. In reality, transporting money from point A to point B is much more complex. It entails a complexity of payment processors, banks, financial clearinghouses, and, if your money crosses borders, international communication and exchange networks like the Society for Worldwide Interbank Financial Telecommunication (SWIFT). Because money does not travel quickly, each intermediate institution must take risks to complete your transaction by accepting pledges, transferring transfers, validating receipt of payments, and so on. For such services, several payments are collected along the road.
A CBDC system would be much more straightforward. A consumer would establish an account with the central bank of a nation, and the central bank would issue (produce) digital money in the account. Importantly, the money is now a direct responsibility of the Fed rather than a private bank. The consumer may then start direct transfers across Fed accounts using a simple smartphone app or other methods. The digital money is instantly removed from one account and regenerated in another. Moving money across borders no longer requires the use of complicated systems like SWIFT or wire transfers, and currencies may be swapped immediately as long as friendly central banks have agreements to do so. No pledges or confidence are required; every transaction is permanently recorded in real time on a digital cryptographic ledger, similar to Bitcoin, but precisely centralized rather than dispersed.
This gets us to the next question: what will CBDCs be used for? The most frequently cited reason for launching CBDCs is to mitigate the risk posed by "stable coins," which are relatively new forms of cryptocurrency that are pegged to the value of a fiat currency (e.g., the dollar or the euro), to material assets such as gold or property, or to another cryptocurrency.
There are also fears that digital behemoths could begin fighting conventional banks and payment operators for market share in the financial industry, as Tencent and Alibaba have done in China. According to a recent UK parliamentary report titled "Central Bank Digital Currencies: A Solution in Search of a Problem?!" "the use of physical cash is declining in many countries, and some central banks are concerned that this may undermine public confidence in the monetary system if individuals are unable to convert commercial bank money into cash, which is a direct claim on the state."
The Bank of England launched a consultation in March 2020 outlining seven ways in which a CBDC may help the Bank's goals of maintaining monetary and financial stability:
By promoting a stable payment landscape.
By avoiding the dangers associated with new types of private money production.
By promoting payment competition, efficiency, and innovation.
By anticipating future payment requirements in a digital economy.
By making central bank money more accessible and usable.
By addressing the repercussions of a cash shortage.
As a facilitator of improved cross-border payments.
The UK's Chancellor of Exchequer, Rishi Sunak, characterized CBDCs as "part of the larger tale of digital innovation" that is sweeping the world in a speech marking the introduction of the G7's study on central bank digital currencies. However, most individuals in the West are unaware of CBDCs, much alone how they can affect their life. According to a poll conducted by G+D Currency Technology, one of the businesses assisting in the development of CBDCs, fewer than 20% of individuals in the United States and Germany were aware of the digital dollar or digital euro, respectively.
So, how may CBDCs affect our lives?
Here are four of the most significant:
It will give central banks considerably greater control over our payment habits.
In theory, a central bank digital currency system would eliminate the need for intermediaries such as banks or credit card firms. That being said, it is reasonable to expect that the greatest financial institutions, the majority of which have contributed to the installation of the CBDC system's design, will find a new position in the new digital reality. NS Lyons observes:
[Central banks] will maintain total monitoring and control over the production, destruction, and "flow" of money, regardless of where it is "kept" or who "possesses" it. "We don't know who's using a $100 note today, and we don't know who's using a 1,000 peso bill today," said Agustin Carstens, general manager of the Bank of International Settlements, during an IMF meeting in 2020. The essential distinction with the CBDC is that the central bank will have complete control over the rules and regulations governing the use of that expression of central bank obligation, and we will also have the capability to enforce it."
That authority might be used to "programme" our spending.
One way central banks may utilize their increased power is to exert influence on people's spending patterns. The Daily Telegraph (behind a paywall) claimed in June 2021 that the Bank of England has urged Government ministers to consider if a central bank digital currency should be "programmable." "There might be some socially good effects from it, avoiding conduct that is deemed to be socially damaging in some manner," says Tom Mutton, a director at the Bank of England. According to Lyons, this might provide significant benefits to both the government and central banks.
If the Fed so desired, it could deduct taxes and fees from any account in real time, with every transaction or paycheck. Tax evasion would be impossible since the Fed would have a comprehensive record of every transaction performed by everyone. Money laundering, terrorist funding, and any other illegal activity would be exceedingly difficult. If CBDC accounts were linked to a network of "smart city" cameras, fines such as speeding or jaywalking might be issued in real time. There would be no need to send out stimulus cheques, tax refunds, or other perks like universal basic income payments. Such funds might simply be placed into accounts. However, a CBDC would enable the government to function at a far higher resolution if desired. Targeted microfinance awards, deposited directly into the accounts of individuals deemed exceptionally worthy, would be a rather straightforward notion.
Other potential programming uses include establishing expiration dates for stimulus money or welfare payments to encourage people to spend them as soon as possible.
According to the Financial Times, central bank digital currencies will almost certainly have to coexist with digital IDs: "What CBDC research and experimentation appears to show is that it will be nearly impossible to issue such currencies outside of a comprehensive national digital ID management system." Meaning: CBDCs will most likely be linked to personal accounts including personal data, credit history, and other types of pertinent information."
Combining digital currencies with digital IDs while phasing out, or even outright prohibiting, the use of cash will allow governments and central banks to not only trace every transaction we make, but also to regulate what we can and cannot spend our money on.
They might also be used to heavily promote "desirable" social and political conduct while punishing those who do not. "The most dangerous people or groups might easily have their digital assets temporarily erased or their accounts' capacity to transact blocked with the click of a button, keeping them out of the commercial system and considerably lowering the harm they offer," Lyons explains. There would be no need for the employment of emergency powers or the coercion of intermediate financial institutions: the United States has no constitutional right enshrining the freedom to transact."
There is no cap on negative interest rates.
Aside from having significantly more influence over people's spending patterns, central banks would also have the option of lowering interest rates even farther into negative territory. If there is no cash, there is no way for individuals to avoid negative interest rates, no matter how low they are. This is one of the advantages of a cashless society that Harvard economist Kenneth Rogoff often extols. Nonetheless, central banks maintain that physical currency will not be phased out until CBDCs are fully operating. But, as I've already said, central banks aren't exactly renowned for following their promises.
On steroids, financial exclusion.
One of the most essential advantages of currency is its universality, which makes it a critical public good, especially for the poorest and most vulnerable members of society. Anyone who objects to others spying on their transactions would also be excluded in a completely cashless society (h/t hickory). As I discuss in my book, Scanned: Why Vaccine Passports and Digital Identity Will Mean the End of Privacy and Personal Freedom, if central banks and governments abolished cash or greatly accelerated its demise by penalizing its use (while incentivizing the use of CBDCs), we would almost certainly see a significant increase in financial exclusion:
Even supporters of CBDCs recognize that central bank digital currencies may have major consequences, such as worsening income and wealth inequality.
"The wealthy may be more capable than others of seizing new investment possibilities and enjoying the majority of the rewards," says Eswar Prasadm, senior scholar at the Brookings Institute and author of The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance. "Because the economically underprivileged have low internet access and financial awareness, some of the improvements may damage as well as aid particular portions of the community."
As a result, the adoption of CBDCs would not only deprive global people of one of the last remnants of freedom, privacy, and anonymity (currency), but it may also accelerate the upward shift of wealth and power that many nations have observed since the COVID-19 epidemic started.
Lyons argues that CBDCs "have the potential to become even more than a technocratic central planner's fantasy if not consciously and thoroughly limited in advance by legislation." They have the potential to be the single largest extension of dictatorial authority in history."
Given the stakes, s are among the most pressing issues that today's societies must address, not just from a financial or economic aspect, but also from an ethical and legal position. They should be debated in every parliament and around every dinner table in every nation on the planet.
SRH: Digital Currencies Granting Total Control Over Every Transaction, Even Limiting What Ordinary People Are Allowed to Spend Their Money On — Bitcoin Will Die Hard — “Central Bank Digital Will Be the Only Currencies” — (CBDCs) Are Exactly What’s Coming…
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