The CBDC Momentum Gathers Pace

It seems the traditional fiat narrative is being overshadowed. What else could explain the frequent updates from regulators worldwide about launching their own digital state-backed currencies?

On September 11, the Reserve Bank of India (RBI) announced its collaboration with lenders to enhance and promote the adoption of the digital rupee. Testing for this Central Bank Digital Currency (CBDC) began in November 2022, and now the government is poised for its full deployment. 

The digital rupee, intended for the retail sector and dubbed CBDC-R, has been integrated with UPI, India's premier instant payment system. This integration allows users to transfer funds across various banks without divulging their account details, using a dedicated app that operates via a QR code.

At present, the digital rupee sees a modest daily volume, with approximately 18,000 transactions. Yet, by year's end, the goal is to escalate this figure to a million transactions daily.

On September 6, Brazil's Central Bank verified plans to introduce the state-backed cryptocurrency, DREX, in early 2024. DREX plans to employ Distributed Ledger Technology (DLT) for facilitating wholesale interbank trades, and its retail iteration will hinge on tokenized bank deposits.

Notably, during the Brazilian CBDC's test phase, several vulnerabilities came to light, but this hasn't deterred the enthusiasm of regulators.

Central Bank representatives are optimistic that this national cryptocurrency will have a positive ripple effect on Brazil's financial landscape and will reduce the operational strain on Brazil's national mint, Casa da Moeda do Brasil. Fábio Araujo, the spearhead of this initiative at the bank, believes the allure of the DREX initiative might rival the success of Brazil's rapid payment system, Pix, introduced in 2020.

In a related vein, Brazil's cryptocurrency enthusiasts are awaiting the simultaneous release of the digital real and the enactment of revised cryptocurrency tax regulations. Under these new guidelines, by March 2024, all crypto traders and miners will be mandated to report their incomes.

The Central Bank of Israel is progressing with its initiative to launch a digital shekel, highlighting the need to enhance the nation's existing payment mechanisms. The development of this digital currency began in 2021, and by 2022, the first trials for electronic payments in the sector of international settlements were undertaken, engaging both the Central Bank of Hong Kong and the Israeli Bank for International Settlements.

On September 12, Amir Yaron, the Governor of the Bank of Israel, remarked at a digital currency conference, “We remain committed to be at the frontier, and more than that, to support the effort of pushing the frontier, in our CBDC explorations, as well as in our efforts to modernize and advance our payment systems ... and the financial system in general.”

Yaron pointed out Israel's advancements in closing the digital economic gap relative to other nations, stressing that the digital shekel's privacy attributes would rival or even exceed traditional cryptocurrencies. However, his statements have been met with skepticism from the local crypto community, showing distrust towards the CBDC initiative.

On September 14, the U.S. House Committee on Financial Services concerning Digital Assets convened a hearing titled “Digital Dollar Dilemma: The Implications of a Central Bank Digital Currency and Private Sector Alternatives.”

Its chair, French Hill, delivered a somewhat disjointed address, with several self-contradictions.

He urged attendees to consider, “I’d also like for Members to hear from our witnesses not only about Communist China’s proposed digital yuan, but what steps the United Kingdom and the European Union have taken and why.”

Shortly after, he seemed dismissive of the idea of launching a digital dollar, asserting, “Look, the Constitution is clear—only Congress has the authority to coin money and regulate the value of such money.”

Yet, towards his closing remarks, he acknowledged the potentialities of digital advancements, declaring, “These developments would provide for instant payments for individuals and businesses through their financial institutions… It’s not OK that the Fed still hasn’t finished this work even a decade later, with no clear timetable for its completion.”

The prevailing sentiment suggests that U.S. regulators remain uncertain about their future course. At present, they appear to be generating substantial discourse and simulating vigorous activity, seemingly to ensure they don't lag behind the evolving global paradigm.

On September 11, Sarah Breeden, an official representative from the Bank of England, announced the necessity for a countrywide dialogue about the introduction of a digital pound, often referred to as 'britcoin'.

The idea of its launch was initially conceived two years prior, and details suggesting that the financial authority had drafted plans for its debut were leaked to the British media in July. 

These revelations led to widespread rumors, some of which claimed that the government, using the CBDC, would stringently oversee its citizens' financial inflows and outflows, and potentially limit the use of tangible cash.

In response to these concerns, officials tried to placate public sentiment, stating that the proposed digital currency would ensure privacy on par with cryptocurrencies like Bitcoin. However, those familiar with how cryptocurrencies operate met their reassurances with skepticism. The primary concern stemmed from the fact that the regulatory body hadn't yet confirmed if the 'britcoin' would operate on the blockchain.

As a result, many members of the public are already inclined to reject the proposed smart cards which would allow payments using this digital state currency, both online and in physical stores.

The European Union grappled with analogous issues. Mairead McGuinness, the European Commissioner for Financial Stability, conducted a press conference earlier in the year. She emphasized that the digital euro was not a surveillance tool or “Big Brother” project and that the European Central Bank (ECB) didn't intend to store users' personal data or curtail the circulation of paper money. 

Her attempts at assurance were met with widespread skepticism. Given the prevailing doubts, McGuinness stated on September 6 that it might be prudent to delay the launch of a digital euro until the subsequent year.

She recommended revisiting the topic after the selection of the new Commission in June 2024.