CBDC — finding a balance between the future and national security

Atlanticcounsil has published an interesting study on the rapid development of digital currencies by central banks around the world. Given the reports that Russia has recently passed a law that will come into effect from the beginning of next year, we can draw very non-linear conclusions.

Global trends

130 countries, accounting for 98% of global GDP, are considering creating CBDCs. In May 2020, only 35 countries were considering creating CBDCs. There are 64 countries at an advanced stage of research (development, pilot project or launch), which is a new high.

19 G20 countries are currently at an advanced stage of CBDC development. Of these, 9 countries are already implementing pilot projects. Almost every G20 country has made significant progress and invested new resources in these projects over the past six months.

11 countries have fully launched digital currencies. China’s pilot, which currently covers 260 million people, is being tested in over 200 scenarios, some of which include public transportation, incentive payments, and e-commerce.

The European Central Bank is preparing to launch its pilot project to introduce the digital euro. More than 20 other countries will take steps to pilot their CBDCs in 2023. Australia, Thailand, and Russia intend to continue pilot testing. India and Brazil plan to launch them in 2024.

In the United States, progress in implementing retail CBDCs has stalled. However, other G7 banks, including the Bank of England and the Bank of Japan, are developing CBDC prototypes and advising the public and private sectors on privacy and financial stability.

The United States, however, is moving forward with the creation of a wholesale (interbank) CBDC. After Russia’s invasion of Ukraine and the imposition of G7 sanctions, the development of wholesale CBDCs doubled. Currently, there are 12 cross-border wholesale CBDC projects.
In Ukraine, the relevant law was adopted in 2021.

Please note that it was the war and sanctions that triggered the doubling of the wholesale CBDC market.

National security issues

There are several challenges, and each of them requires careful consideration before a country launches a CBDC.

Given that the CDBC is primarily a fiat currency, as the issuer is the country’s central bank, just in digital form, the risk of impact on financial stability in the event of high demand for CBDCs and a change in the type of savings from regular to digital should be assessed. Such a scenario would definitely affect interest rates and the lending capacity of banks. This is especially true for countries with unstable financial systems.

The research base on the impact of CDBC introduction on the social environment of society is not sufficiently studied. The experience of the project in China is particularly interesting from the point of view of social engineering, but there is no public data on it yet.

Cybersecurity risks need to be considered, as CBDCs are vulnerable to cyberattacks and need to be resilient to them.

But the most important risks are in the process of use. Each country has to find its own Use Case. CBDCs require a sophisticated legal and regulatory framework, including privacy, consumer protection, and anti-money laundering standards, which need to be strengthened before implementing this technology. Introducing CDCS without a specific wholesale or retail Use Case makes no sense.
My favorite Use Case example is that of one of the countries in the Caribbean region — which consists of several hundred islands; imagine the economic impact of implementing CDCS — simply by eliminating the need for inter-island collection.

On the other hand, the introduction of cross-border payment systems should be viewed in the context of modern military realities. As mentioned at the beginning, even Russia has passed a law to this effect.
Such systems may reduce the ability to monitor compliance with sanctions by limiting the ability to track cross-border financial flows in traditional currencies.

Therefore, the issue of controlling the use of CBDC in the world and especially in Ukraine at war should be addressed at this intersection of the future of money and national security.

Source: Medium

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