Institutional adoption is moving at light speed, with the likes of Visa and JPMorgan partnering with public blockchains. The path governments around the world will take to adapt to this new era of digital money is considerably less clear. This article discusses some of the architectural options (public and private blockchains; retail vs wholesale/interbank) for CBDCs, including examples that are live (Bahamas & Cambodia) and one notable example on life support (Venezuela). ‍

States around the world are paying attention to the evolution of cryptocurrencies and their nascent mass adoption on a global scale. Bitcoin has risen to amazing new heights; maintaining a market cap of over $1 Trillion USD, just behind Silver and Google, and over taking the likes of JP Morgan, Tencent, Berkshire Hathaway and Facebook(1). Bitcoin being more scarce, portable, and difficult to counterfeit asset is expected to overtake gold's $11 Trillion Dollar market cap(2) in the next decade or sooner. 

The market cap of the broader ecosystem that has evolved around blockchain technology with projects like Ethereum, Polkadot, Thorchain and Solana leading the massive wave of DeFi is estimated at $64 Billion(3). Out of necessity to mirror the US Dollar and create on-ramps into cryptocurrency, projects like Tether (USDT) and the eminent US Dollar Coin (USDC) are currently being minted to capture this new market. These “crypto dollars” or “stable coins” and the exchanges that carry them provide a way for financial institutions to quickly get access to crypto assets and provide high volumes of liquidity for large transactions. Right now Tether has a market cap of $51.8 Billion and USDC has a market cap of $13.7 Billion respectively, both growing substantially over the last 12 months.

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‍Paradigm Shifts

These crypto dollars are moving at light speed converting into Bitcoin, Ethereum and countless other cryptocurrencies; all the while creating a high amount of liquidity in the markets. What does this all mean for individual countries around the world? It’s clear that the paradigm of fiat money is changing. Crypto credit cards, credit scores, cross border payment & remittance, loans, market hours, and ultimately control over a sizable helping of the monetary supply are just a few but powerful examples of how this shift is unfolding rapidly before our eyes. Jeremy Allaire, the CEO of Circle the company behind USD Coin noted on The Pomp Podcast recently referring to CBDC (Central Bank Digital Currencies):‍

“We absolutely see opportunities to partner with national governments around the world.  We believe in the open source and open internet public chain innovation and the velocity of things happening with that is amazing. We are seeing the private sector far outpacing the public (Government) sector so we do see opportunities.”

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‍Like all budding industries, regulations will play their part in helping or hindering the adoption of digital currencies, but here they must do so without any roadmaps for a technology far from maturation. Turning their gaze to DeFi, central monetary authorities can’t ignore the financial incentives to regain some control over a 600 billion dollar industry(4).

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CBDC’s Are Live‍

But will governments want to implement an open source, permissionless crypto dollar as their Central Bank Digital Currencies (CBDC)? There is a paradox in that last sentence alone. Or will we see some countries rein in public, permissionless blockchains and create a sort of firewall around their specific CBDC? One firewall scenario would be disallowing a CBDC from being traded into Bitcoin (like one does with a stablecoins such as Tether). These are the questions many institutions, governments, and VASPs (Virtual Asset Service Providers) are now reckoning with.

A look back at Venezuela in 2018, while trying to circumvent heavy sanctions from the USA and a currency spiringling ever more into a hyperinflation tornado, Venezuela rolled out their own version of a CBDC called the Petro. This was issued by the controlling regime which claimed that the Petro was backed by their Diamond and Petroleum reserves, and the price would be pegged to the price of 1 barrel of Venezuelan petrol. While the petro never managed to achieve any meaningful traction, this hasn’t stopped Maduro from trying. As of 2020 international airliners need to pay in petros to refuel at the Maiquetía Caracas airport, and employee bonuses would be issued in petro (with a ban on transferring them back into bolivars, of course).

Back in 2017 Estonia propositioned the world with their idea to roll out a Virtual Currency, but they were met with a hard no from the European Central Bank (ECB) President Mario Draghi: “I will comment on the Estonian decision: no member state can introduce its own currency. The currency of the euro zone is the euro.” He elaborated to Reuters: “A rise in popularity in so called cryptocurrencies, which are normally issued by private companies and exist only in electronic form, has been worrying the ECB, which has said they could in theory erode its control over the supply of money.”‍

Cambodia’s central bank officially launched its version of a (quasi) CBDC, on October 28 2020. Project Bakong became the first government blockchain project of it’s kind in Asia; a move that will streamline peer-to-peer payments and reduce transfer fees. However, the Camboidan CBDC does not actually involve the exchange of central bank-backed tokens but instead supports transactions in both Cambodian riel and USD.

The best example at the time of writing is the Sand Dollar, the CBDC of the Bahamas. The central bank remains in control of the blockchain infrastructure and minting, while deferring to the public sector for delivering consumer facing wallets and payment applications. Additionally, there are thresholds for KYC. Meaning citizens without photo ID’s can still hold and trade Sand Dollars up to a $500 USD equivalent balance per month, or $1,500 in transactions(5).  To its detriment, even with full KYC holders are limited to an $8,000 balance per month and as of yet, no interoperability.

The world has yet to see an example of a highly successful CBDC rollout.‍

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Next to Market‍

There is an important differentiation between wholesale and retail CBDCs. The Official Monetary and Financial Institutions Forum (OMFIF) provides a succinct definition: “A 'retail' CBDC would be used like a digital extension of cash by all people and companies, whereas a 'wholesale' CBDC could be used only by permitted institutions as a settlement asset in the interbank market”(6).

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More and more nations are expressing interest in testing out CBDCs in a variety of ways; with a high percentage choosing to roll out retail CBDCs which is by in large the simpler option. PwC has an index showing countries who have developed these retail CBDCs for use by consumers and merchants(7).

Countries like Singapore and Thailand are at the leading edge of this phase change transition into wholesale-interbank digital currencies, taking on the more complex and involved version of the CBDCs. Singapore is charging forth with their own creative approach to, propositioning a multi-currency settlement network which will likely turn into a central hub of value accrual as well as a place for virtual asset monitoring.

“You will soon hear about the commercial launch of a multi-currency payment system for digital currencies. We feel strongly about sharing our experience and contributing towards advancing central banks’ interest in m-CBDCs". said Sopnendu Mohanty, the CFO of the Monetary Authority of Singapore (MAS)(8).

Banks such as JPMorgan Chase, Temasek and DBS Bank are all deeply involved and collaborating in the m-CBDC project in Singapore. JPMorgan has created their own business unit in line with the project called Onyx (9). Jamie Dimond says of the project: “Onyx is at the forefront of a major shift in the financial services industry. This new business unit reflects J.P. Morgan's commitment to innovation as we continue to build cutting-edge technology that delivers a better, faster and more inclusive financial system.”

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Smart Money & The Private Sector

Marc Andreesin’s famous saying: “Software is eating the world” is very much proving to be true. Software is certainly eating fiat money and spitting back out programmable, liquid currency. What does this mean for retail banks? Will CBDCs make it easier or harder for banks to access and provide services around cryptocurrencies? One thing is becoming increasingly clear, financial institutions that don’t get on board will be left behind. Many countries are diving in deep and taking initiative to work across the public and private sector to update their money; even before offering regulatory clarity.

“Swift is 100s or thousands of private sector firms collaborating on technical standards and interoperability. Take the most popular form of electronic money today which is credit cards. This is all privately issued digital money. This is the same thing as USDC.” said Jeremy Allaire of USD Coin, speaking of the current SWIFT system.

Visa, the second largest card payment system in the world, agrees with Jeremy as they have recently adopted USDC as a settlement layer. Governments would be wise to follow in the steps of the private sector by partnering with public blockchains instead of hedging them out. The public blockchain ecosystem has tremendous economic and network effects, the centralized blockchain approach could mirror the incompatibility woes of Venezuela.

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2021: A Turning Point for Digital Assets‍

Speed, traceability, programmability, ease of distribution and the redundancy of manufacturing physical money are just a few of the clear benefits to updating current governmental monetary systems. We aren’t so far off from CBDCs being adopted around the world. The question remains: Which countries CBDC’s are going to be interoperable with public blockchains and which will be isolated and constrained behind a firewall, totally controlled by the ruling authority?

Crypto users are notoriously pro freedom and pro individual, will they be incentivized to buy back into a centralized monetary system? Cryptocurrencies are only growing in demand and popularity; perhaps the first movers will opt out of CBDC’s all together as two financial ego systems emerge. ‍

As we see institutions like Visa, JP Morgan, BNY Mellon and more recently Germany’s decision to open up the floodgates to more than 4000 institutions to invest in crypto(10), 2021 will likely be looked back on as the turning point for mass adoption. And this decade will be remembered as the time when digital currencies forever altered the global monetary system.

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(1) "Assets ranked by Market Cap - CompaniesMarketCap.com." https://companiesmarketcap.com/assets-by-market-cap/. Accessed 29 Apr. 2021

(2) "Assets ranked by Market Cap ...." https://companiesmarketcap.com/assets-by-market-cap/. Accessed 29 Apr. 2021.

(3) "DeFi Pulse." https://defipulse.com/. Accessed 29 Apr. 2021.

(4) "Bitcoin market cap 2013-2021 | Statista." 15 Apr. 2021, https://www.statista.com/statistics/377382/bitcoin-market-capitalization/. Accessed 10 May. 2021.

(5) "Central Bank of Bahamas makes progress with Sand dollar CBDC ...." 6 Apr. 2021, https://www.ledgerinsights.com/central-bank-of-bahamas-makes-progress-with-sand-dollar-cbdc/. Accessed 10 May. 2021.

(6) "OMFIF." https://www.omfif.org/. Accessed 3 May. 2021.

(7) "Retail CBDC projects 'particularly strong' in emerging economies ...." 28 Apr. 2021, https://www.nfcw.com/2021/04/28/371928/retail-cbdc-projects-particularly-strong-in-emerging-economies-pwc-index-shows/. Accessed 29 Apr. 2021.

(8) "MAS Teases Multi-Currency Payment System for Digital Currencies." https://www.finews.asia/finance/34328-mas-teases-multi-currency-payment-system-for-digital-currencies-project-ubin-dunbar-cbdc. Accessed 29 Apr. 2021.

(9) "Multi-CBDCs: Designing a digital currency stack for governability." 21 Apr. 2021, https://opennodes.com/2021-04-22-02-40-28-multi-cbdcs-designing-a-digital-currency-stack-for-governability. Accessed 29 Apr. 2021.

(10) "'Damn Huge': Germany Opens Up to Institutional Crypto ... - Decrypt." 28 Apr. 2021, https://decrypt.co/69323/damn-huge-germany-opens-up-to-institutional-crypto-funds. Accessed 29 Apr. 2021.

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