On September 23, 2021, the Royal Monetary Authority (RMA) of Bhutan issued a press release on the piloting of Central Bank Digital Currency (CBDC) in collaboration with Ripple, USA. Ripple, an enterprise blockchain company based in the US, is said to have engaged with a plethora of financial institutions across more than 55 countries.

CBDC is a digital version of cash—the physical money issued by central banks using blockchain technology. A blockchain is basically a digital ledger of transactions that is duplicated and distributed in such a way that it makes it difficult or impossible to change, hack, or cheat the system.

RMA’s decision to pilot CBDC is well-timed and with the change in times, adoption of new technology should be given more priority. Handling cash may become history in the coming decades.

Nearly a decade ago, ATMs were considered the latest technology in the banking sector, and today, they have become obsolete in some developed countries. Wearables have replaced ATMs, pushing the banking executives to re-think their approach. Customers know ATMs are no longer the most efficient banking service. Future banking is likely to focus more on robust service delivery with minimum staff interaction.

Blockchain technology started to gain popularity after cryptocurrency bitcoin was launched in 2009. Since then numerous blockchains have started to emerge, proliferating across different countries. At the beginning of 2021, conventional banking’s total global market value was 81% and within a few months it dropped to 72%, indicating the rapid digitization and adoption of more online platforms.

The pandemic has further enlarged the speed of digitization. Monetary authorities across the globe are exploring CBDCs out of fear of losing control and to improve financial service delivery. CBDC, through adopting blockchain technology, is currently the most viable centralised option in the face of rising decentralized finance. Decentralized Finance (DeFi), is also a blockchain-based ecosystem of financial services that aims to spread power across the network instead of being controlled. DeFi products like Bitcoin and Ethereum have gained worldwide popularity and some countries have even legalized them.

DeFi is likely to challenge CBDC in the coming decades. Out of the 7 billion-plus population across the globe, 1.7 billion lack bank accounts. DeFi is taking advantage of considering the number of populations that have no accessibility to banks.

China, which is charting its course, is said to have been at the forefront of digital payments and much ahead compared to the US. According to Wall Street Journal, e-CNY is testing in Thailand, United Arab Emirates, and Hong Kong, and by the end of June 2021 more than 24 million individual and enterprise users have created e-CNY wallets, funnelling transactions worth billions. However, cross-border payments and inter-operability remain a big challenge. Recent news suggested that other nations have to proceed cautiously. China started exploring blockchain back in 2014 through the establishment of an institute and today digital currencies are used in utilities, restaurants, and transport.

Of the several cutting-edge technologies, blockchain technology is likely to shape the way banking functions and the way services are delivered. Developed countries are exploring implementation in human resource management and land transactions due to immutability.

There are exactly 11,145 different cryptocurrencies as of June 2021. In the absence of regulation, cryptocurrencies are rife with fraud, private abuses, and are known for funding terrorism. Today, hackers demand ransom in cryptocurrencies.

Privately run digital platforms, when spread across networks without any authority to control them, have a high degree of probability to cause chaos to the economy. Fund injection during a crisis will be a herculean task.

Today, the Google Play Store is overflowing with numerous apps that are said to mine cryptocurrency. But not all apps can be trusted. Some are masquerading as mining apps but are looking for data for insider trading, and some employ tracking technology to earn revenue through advertising. Some try to build the community worldwide. For instance, Pi Network has gained footing in a wide range of communities across 250 countries with more than 25 million miners. Pi, which has yet to become crypto, is currently in the test net and has more nodes compared to Bitcoin. When such a privately-run platform goes live and spreads across the network like bitcoin with publicly visible transactions, people will stop availing of services from conventional banks and will prefer such platforms because of cheap transaction fees, as well as fast and easy cross-border payments.

Monetary authorities across the globe have explored CBDC to fight against decentralized finance along with stern regulations. Regulations have not worked fruitfully thus far. Thus far in CBDC, as of October 2020, the Bahamas launched the CBDC known as ‘Sand Dollar.’ Because the geographical terrain of the Bahamas is mostly scattered, setting up financial or banking infrastructures was found to cost more, and hence, they opted for retail CDBC.

Then EI Salvador became the first country to accept Bitcoin as a legal tender after BitcoinLaw was approved by a majority of the Salvadoran congress. Almost 20% of GDP comes from remittances. Receiving remittances through conventional banking is expensive, whereas gas fees for bitcoin are far cheaper and transfers faster. On September 9, 2021, CNBC reported that the Ukraine has legalized bitcoin.

Some speculate that the launching of CBDC was the wake-up call that Facebook’s currency Diem, (formerly known as Libra) represented when Facebook tried to launch it in June 2019. Diem shocked the monetary authorities across the globe, as Facebook has billions of users worldwide. Of course, Diem may not get approved; it carries with it the risk that tech giants will dominate the monetary system too if monetary authorities across the globe do not wake up and push the CBDC.

On May 14, 2021, ‘The Economist’ magazine reported on the status of CBDCs across the globe. CBDC is sometimes known as ‘govcoins.’ China has rolled out e-YUAN. The European Union wants to have virtual Euro by 2025. Britain has launched a task force, and the USA is building a hypothetical e-dollar. Singapore invested $ 12 million for blockchain technology research. Switzerland issued a White Paper, in June 2021. Sweden is planning to launch CBDC known as e-Krona.

However immutable blockchain technology is said to be, the crypto space does not escape from the clutch of hackers. On August 10, 2021, the Poly Network, which was developed to implement interoperability between multiple chains, experienced its largest cyber heist. USD 610 million were stolen by a hacker consisting of Ethereum, Binance Smart Chain, and Polygon Chain. The hacker explored vulnerabilities in the technology adopted by Poly Network.

In one of his conversations with the team of Poly Network that was made available on Twitter, Mr White Hacker said that “in the DeFi world, you can trust nobody but the code and yourself.”

Blockchain technology has a huge potential for enhancing the banking sector, while it may also potentially disrupt the way financial institutions function. Therefore, it is timely and laudable that the RMA is piloting a blockchain-based CBDC that will give us enough opportunity to assess the benefits and relish a cashless economy.

Contributed by 

Pema Wangchuk, Thimphu