CBDC Round-Up

China’s e-CNY Competes with Visa at the Olympics

The Beijing Winter Olympics has seen a third payment option be used at an Olympic Games for the first time since 1986 (when Visa got became the exclusive payment service provider alongside cash). China’s CBDC, the e-CNY, is being used within the ‘Olympic bubble’, the quarantine area for all athletes, officials, media and visitors to the Olympics.

For the end users in the bubble, e-CNY payments are indistinguishable from paying with a prepayment card at the point of sale. Using e-CNY is cheaper than paying with Visa because there are no fees for using e-CNY in China. The usual processing fee for international payments is not required at the point of sale, although loading the value onto the app will have incurred a cost for foreign visitors.

The Chinese media have insisted that the e-CNY is a digital-native version of China’s fiat currency and does not, therefore violate Visa’s exclusive deal, despite Visa having exclusive rights to ‘prepaid cards’ at the Olympics.

On the other hand, until 2018 Beijing did not allow any foreign payment service provider to operate in China. Visa still does not have a license to operate a bank card clearing service and so can’t charge merchant fees because it is not providing a payment service. The UnionPay network processes Visa card payments made in China.

In 2018, five years after the US complained to the World Trade Organization about China’s exclusionary practices, Beijing granted American Express an operating licence. In 2020, Beijing granted Mastercard a license to operate a bank card clearing business in China too. Visa, despite applying for a licence in 2017, remains an unapproved outlier.

More Countries Plan CBDCs

There has been a steady stream of announcements of plans to issue CBDCs.

The Indian government has said that a digital rupee, based on blockchain technology, will be issued starting from the financial year 2022-23. It will be managed by the Reserve Bank of India (RBI) and introduced in a phased implementation. In October 2021 the RBI moved a proposal to amend the Reserve Bank of India Act, 1934, to amend the definition of a ‘banknote’ to include a digital currency.

Similarly, the Central Bank of Nigeria (CBN) launched the eNaira in October 2021. Its reasons for the launch were to improve the availability and access to central bank money, support a resilient payments system, encourage financial inclusion, and reduce the cost of processing cash. CBN said in December 2021 that 583,000 personal wallets and 83,000 merchant wallets had been issued with total transactions of N188 million ($500,000). It will be interesting to see how the take up increases over time.

The Central Bank of Kenya has asked the public for their views on introducing a future digital currency. The bank lays out the risks and benefits, particularly mentioning cross-border payments. It suggests that the countries in the region need to participate to reduce the complexity of cross-border payments and to shorten the payments chain. Tanzania has already announced that it is considering a CBDC.

Meanwhile the Bank of Zambia is also said to be researching a CBDC with the aim of cutting transaction costs, increase participation in the financial system and improve traceability, efficiency and the safety of the payment system. The research should be completed by the end of 2022.

The Bank of Japan is reported by the Japan Times to be researching CBDCs, quoting the Director-General of the Payment and Settlement Systems Department at the Bank. When considering the underlying technology, an interesting area of investigation is how to manage payment history given the value and number of payments likely to be made in an advanced economy such as Japan.

In Paraguay, the central bank has reminded the public that the only valid currency is the guarani and cryptocurrencies such as Bitcoin are not legal tender. In the same statement, the central bank said that it is analysing issuing a CBDC.

ECCB CBDC Faces Early Technical Challenges

On 14 January the ECCB had to take down its DCash CBDC due to ‘technical issues’.

DCash was piloted in March 2021 after two years preparatory work. The central bank has logged all failed transactions so that they can be honoured once the full network is back in service. The DCash uses the same technology company as CBN, Bitt.

Transactions Speeds Meet Needs for a Digital Dollar

The Federal Reserve of Boston and the Massachusetts Institute of Technology have reported on the first phase of Project Hamilton, their Digital Currency Initiative (MIT DCI).

They have succeeded in designing a processor that delivered transaction speeds and throughput robustly, meeting fault tolerance requirements for a large retail payment system.

The project also set out to create a flexible platform for collaboration, data gathering, comparison with multiple architectures, and other future research. With this in mind, they have made public under the MIT open-source licence.

The baseline requirement for the processor included time to finality of less than five seconds, throughput of greater than 100,000 transactions per second, and wide-scale geographic fault tolerance.

Two approaches were pursued and proved successful, although the first solution had a peak throughput of 170,000 transactions per section due to a bottleneck on the ordering server. The second architecture had a throughput of 1.7 million transactions per second and with superior scalability, but did not materialise an ordered history for all transactions.

A second phase will now address questions about high-security issuance, systemwide auditability, programmability, how to balance privacy with compliance, technical roles for intermediaries, and resilience to denial-of-service attacks.