CBDCs are on the way. From China to the United Arab Emirates, from the Bahamas to Nigeria, countries around the world have begun testing the use of central bank digital currencies as a way to convert their national fiat currencies into a digital medium of exchange. One of the drivers of these state-backed digital currencies is the dramatic decline in the use of physical cash which, according to McKinsey, fell by around a third in Europe between 2014 and 2021. The Digital Payments Authority is so strong because, in extremis, they are redeemable through public treasury issued by central banks. However, as the popularity of physical silver declines, this link may break down. As these payment systems become increasingly global, central banks are eager to introduce CBDCs to reaffirm their role as capital anchors.
This was the rationale for the Reserve Bank of India (RBI) to officially start piloting its own CBDC, the electronic rupee, last week. The result of two years of research by the central bank, the RBI explained in a concept note published in October that the project would “strengthen India’s digital economy, improve financial inclusion and make monetary and payment systems more effective”. Supported by State Bank of India, ICICI Bank, Yes Bank and IDC First Bank, the pilot will run in select locations and groups across the country via a digital wallet offered by these institutions. There is only one problem: the actual popularity of CBDCs in other democracies remains incredibly low.
Take Nigeria. She launched her own CBDC, the e-Naira, in October 2021. Since then, adoption has been lackluster. Ten months after the launch of the e-Naira, the Governor of the Central Bank of Nigeria admitted that the digital currency had recorded only 200,000 transactions, with a total value of $9.5 million. This stands in stark contrast to the estimated value of crypto transactions in the country, which totaled almost $20 billion between July 2021 and June 2022, according to Chainalysis. Adesoji Solanke, director of investment bank Renaissance Capital, said that a lot of hope was also placed on e-Naira to circumvent currency shortages, but that it “is not currently dealing with any of these cases of basic use”. In May this year, only 80 retailers registered with the country’s CBDC, while last week the total number of downloads for the e-Naira app stood at 500,000, equivalent to just 0. 25% of the Nigerian population.
A similar pattern has occurred in the Caribbean, home to the Bahamian sand dollar, Jamaica’s JAM-DEX and DCash, which is used in eight eastern seaboard islands in the region. While in Nigeria the national debate surrounding the adoption of CBDCs has been dominated by government hostility towards cryptocurrencies, the conversation in these island nations has been defined by how they could improve financial inclusion. : About 17% of Jamaicans and 18% of Bahamians, for example, remain unbanked. Even so, only 3.4% of citizens in the former have downloaded the Lynk app, while this figure is even lower for DCash and Sand Dollar downloads.
Its potential audience may have been baffled by the many technical issues that have plagued CBDCs in the region. In Jamaica, for example, onboarding merchants proved extremely difficult, where earlier this year DCash went offline for two months after the certificate for the network that hosts the distributed ledger expired. CBDC. Additionally, while the IMF praised the digital currency for its potential to foster financial inclusion, it encouraged the Bahamian government to “accelerate its education campaigns and continue to build internal capacity, including in cybersecurity, and oversight of the CBDC project to safeguard financial integrity”.
Indeed, the only case of a CBDC performing beyond expectations was that of the digital yuan. Also known as e-CNY, the People’s Bank of China began testing the digital currency in September 2021. Since then, transactions using the CBDC have topped $13.9 billion, a success some have attributed to its introduction into an economy where digital payments have almost eclipsed those using cash and where cryptocurrencies are being vigorously phased out. Active promotion by the central government also didn’t hurt – a campaign ostensibly based on the role the digital yuan could play in reducing systemic risk in the national payments system but also, some speculated, on the fact that it provides another opportunity for the state to interfere in the transactions of individuals.
India is a completely different case. Here, the national conversation surrounding the launch of the digital rupee has been strongly defined by government hostility towards cryptocurrencies, driven by the perceived threat they pose to the stability of the country’s financial system and their widespread use in financial scams. Earlier this year, for example, Satish Kumbhani, the founder of BitConnect, was indicted by the United States Department of Justice for “orchestrating a global Ponzi scheme,” defrauding investors of $2.4 billion. . As such, the Indian government has attempted to use every power at its disposal to crush crypto, imposing a 30% tax on revenue from cryptocurrency trading (an outright legal ban has been overturned by the Supreme Court in 2018.) Despite this, India remains a global leader in cryptocurrency adoption, ranking fourth in the world according to Chainalysis and trading some $172 billion worth of BTC, ETH and other coins in the year to June 2022.
Such use is partly explained by the large remittance market across India, which the World Bank has estimated at $100 billion this year. More Indian expats are now turning to crypto for cross-border payments, avoiding established financial institutions that take a large chunk of every transaction. A digital rupee could, its proponents hope, offer consumers a state-sponsored alternative that isn’t hostage to scams, outages and extreme market volatility. Even so, researchers at PwC recently argued that while the CBDC could theoretically facilitate faster remittance payments, this can only happen if other major economies collaborate on the infrastructure needed for it.
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For now, however, the Indian government appears to be taking a cautious stance on the rollout of the digital rupee, having initially limited its pilot project to “settlement of secondary market transactions in government securities”. Its reception in Indian banking has been mixed, with financiers saying Reuters that settling such transactions using digital rupees is inefficient compared to traditional methods. “I don’t think once the pilot is done, without any pressure from the RBI, banks will want to use it,” said a private banker. Going by the global track record of CBDCs, neither do Indian consumers.
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