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Anand Mahindra, an Indian billionaire and member of the board of the Reserve Bank of India, buys some pomegranates from a street vendor paying in Digital Rupees.
The payments themselves are straightforward, just a scan of the QR code, but underneath we’re led to think there’s been a huge leap in technology.
Not least because India was one of the first to launch a central bank digital currency (CBDC). This new invention was considered to have the potential to change banking, but is now being implemented in a very tame form.
The aim was for e-rupees to become digital money, but in practice that ambition appears to be absent.
This CBDC uses the blockchain, we were told. e-CNY no. They originally planned, but in the end their plans changed so much that they didn’t make sense anymore.
Likewise with e-rupees, if we really use blockchain, we can’t see much.
Instead of numbers and letters, the rupee wallet seems to be more just letters.
There is no private key as such, but a password is used.
Payment is not to the address, but to the name.
So on the surface it doesn’t look like crypto and underneath it’s very different too.
There are two aspects, wholesale and retail e-rupees.
The central bank is responsible for wholesale rupees that it provides to commercial banks via an account based system, so the same way as in rupees without blockchain here.
Commercial banks then provide access to the public through wallets that look very much like bank accounts.
You don’t need a bank account, neither e-rupees nor e-CNY claims, but there is no other way to access this digital money than through these banks, no self-help wallets.
For the e-rupee, they don’t provide any technical details regarding the blockchain, but it seems to operate the same as the e-CNY that doesn’t have a blockchain.
The e-rupee is a public token with a separate serial number and is issued in cash predominance, so 1, 5, 20 notes.
In theory you can withdraw this digital cash from the bank to your own wallet, just like real cash, but in practice you need a bank app for now, so you can’t.
For CNY, they’ve developed an offline hardware wallet, potentially kicking you out of the banking system, but that’s for a small amount.
Anonymity for small payments, but transparency otherwise, is their motto. No one has determined exactly what the diminutives are, but we can assume that they are in the hundreds, not the thousands.
e-Rupee itself does not attract any interest. They do it for the commercial banks if they deposit it with the central bank because for rupees they charge interest like that, but not for the public even though in theory they have an account with the central bank.
But in practice they don’t. The central bank is only responsible for wholesale rupees. Retail e-rupee is basically bank money.
They haven’t added interest because they claim it will disrupt the banking system because e-rupees can actually be attractive.
The possibility of providing interest to the public however was one of the main conceptual appeals when CBDC was first discussed, with Fed researchers suggesting it could address the interest problem.
That is, money is created at the expense of interest on borrowers, governments and society, both of which bear the costs of this money creation through inflation, and see no benefit as only banks can charge interest on loans.
However the initial concept of CBDC is now a world of difference as the implementation is now basically the same as regular fiat.
No one other than the bank has access to the central bank, the bank acts as a gatekeeper to the public, and instead of cash it is digital bank money held in small amounts at the end.
Some theories suggesting commercial banks simply became central bank licensees and they were tacitly nationalized are, therefore, out of date.
Because e-rupees are actually just rupees. Because the central bank does not provide accounts, supervision and the rest is compartmentalized like bank money. The only potential difference here is that for a small amount it can be like cash insofar as you can store it yourself digitally without needing a bank, but the implied amount is more pocket money.
India’s central bank has made no secret of the fact that their main goal is to make crypto less attractive.
They even claim in some of their statements that it is like crypto, which is not true because we haven’t seen block explorers, not to mention about fixed limits.
Some even claim there’s programmability, but that’s a different breed than Solidity at least so far, and it’s more how you can program credit card payments via an API.
So a big step forward? Well, more and more banks are trying to fool the public without giving the public an inch, but how do they compare to stablecoins?
CBDC vs Actual Fiat Crypto
The CBDC discussions as far as we are concerned were closed by the Swedish central bank sometime in 2018 when they pointed out the technological aspect is easy, they can do it on the blockchain too, but the political ramifications are potentially huge.
From total oversight to commercial banks no longer in money creation at the same level, true crypto CBDCs have the potential to be a matter of referendum.
But the current CBDC has nothing to do with crypto unless you want to be very literal in interpretation to the extent that they might use some cryptography somewhere.
Instead, they are storefronts except as stated for a very small amount, they could end up being like cash once they launch a true self-custody wallet.
But so far, from the perspective of this space, they were useless. You can’t put it on an eth smart contract, you can’t transfer it like USDc, so so far it’s not cash but bank money.
However, USDc is cash, to a certain extent, and once the Fed supports them as they have to it is only a matter of time, it will become fully cash.
However, not many countries have the privilege to adopt USDc or USDt. In fact no country is doing it except the US.
Four major Australian banks are launching AUD stablecoins, and certainly other non-dollar stablecoins have the potential to take off.
This can be one of the other ways to earn money in the actual game. We’ve previously suggested a smart move for small money in this context, like the pound, maybe for the Bank of England to take the lead and announce they support it, but the banks issuing it are pretty much the same.
The interesting question is whether this e-money is another way to get into the game. Do they act as a systemic stablecoin.
However, the way it is implemented leaves a lot to be desired as it is very restrictive when compared to stablecoins.
The Reserve Bank of India for example says and is explicit that they want control, that they don’t like distractions, and are definitely not cool as far as they’re concerned.
But the problem is that no one cares about their preferences. There is a one dollar stablecoin eating the world and no one else is getting in on the game and that could develop into a problem.
For e-CNY for example, it appears that $13 billion has been in circulation, however we are not feeling any effect from it and the comments from Chinese users are that it is no different than bank money.
That’s because they’ve been designed a lot like bank money, a gimmick.
However the CNY stablecoin will be different because anyone can hold it or reject it, anywhere in the world.
The West has therefore been a bit lucky because they really like control because the market certainly doesn’t like control, but breaking into this market for Europe in particular is proving difficult.
The extra difficulty they face is that the US can do whatever it takes to gain a competitive advantage to spur adoption.
One way is for example by giving interest in the euro stablecoin. That would be a desperate move in some ways, and the US might even allow them for sometime since the blockchain forex market probably benefits most people.
It’s unclear but central bankers have clear views on the matter. While those from the Fed, at least some in their ranks, have shown candor, the ECB is at best neutral and less than neutral, while the RBI stirs up hostility.
This bias may blind them to opportunities. A new code-based financial system is being built. It was still nascent, but in banking and finance only the sluggish now say bad things about it.
This new system is not going to replace central banks or banking, at least in the near future, let alone governments as the RBI said in one of their last decade’s statements today.
But it will update it or complement it in some ways. Fiat crypto money is one of them, and central bankers – especially those who see crypto as competition, should love it.
The government in our view should also see it as a sort of matter of national interest. The United States, for now, takes all global trading in crypto fiat, everyone.
To give you an idea, about $350 billion has moved on-chain via bitcoin so far this month. The number of stablecoins is also in the billions.
If cryptos were 10x, these figures would start to be a real proportion of actual fiat. It’s still small, maybe 5% or 10%, but those billions can become trillions.
Therefore, central banks, especially outside the US, and governments, when looking at crypto fiat, need to do it with a very clear eye and less from a competition perspective and more from an opportunity perspective.
The opportunity, for a country like the UK in particular which is small but can have a big impact, and for the Euro, is huge because fiat crypto is fiat, but with smart contracts and blockchain.
This means it is available to anyone worldwide and especially useful – outside of crypto trading – in crisis-ridden countries where a secure store of value is needed.
This kind of fiat crypto can have an impact, and for the dollar it does because it emerges from the market to meet market needs.
Yet why e-money should have an impact is unclear, especially the way they are designed appears to be uniform across central banks.
Maybe it makes some systems better, but it is not global money, like stablecoins, and cannot interoperate with crypto.
Because of this, many lost interest long ago, but stablecoins are a hot story in geopolitics with these for countries in many ways like their internet strategy, or often the lack thereof, back in 1995.
Much like back then, Europe in particular is at risk of falling behind at this particular juncture as the market is yet to push for euro stablecoins, meaning it may need some sort of push.
Maybe the Australian way, but a euro-based crypto exchange, maybe like BitPanda, offering unlimited conversions from euro to eurob might make a dent.
Failure to do so provides total dollar dominance and in the years to come, it may prove costly.
Therefore, rather than focusing their efforts on these CBDCs, which are closed issues of serious concern, countries need to start asking themselves what their crypto strategy is.
Because we’ve passed the stage where skepticism or worse, hostility, is understandable. We are instead more at the stage of which countries will follow suit and even wonder if any of them will jump this far to the point of dominance.
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