A new paradigm is Central Bank Digital Currency (CBDC).
Through Michael Siddhi
posted at 2:37 p.m. Nov 02, 2022. Himalayan Times
Today, value of almost any kind is defined, quantified and regulated by centralized organization.
KATHMANDU, NOVEMBER 2
Imagine the Central Bank’s new monetary tool kit if they were enabled to issue a programmable money which can only be used for the intended purpose or are equipped with digital money that has an expiry date. Or consider a power of digital currency that can dissuade tax evasion, deter money laundering, broaden tax net, control criminal activities and even help the government to meet the social objectives like distribution of social payments.
The advent of blockchain, cryptocurrency, stablecoins & the likes of bitcoins & ether is going to change the way money is perceived by the society. History has evidenced that the concept of money evolves & undergoes changes over a period of time. During the beginning of civilization, it was cowrie shells which was replaced by early coins, then came paper currency & the gold standard which transformed to the floating exchange rate system. Thereafter the money has simply been a paper issued by the government and thus called fiat currency which is still the dominant form of money. Now, with the advent of Distributed ledger technology, the concept of money is undergoing change again as cryptocurrency and decentralized technology that underpin them may represent the next step in the evolution of the money.
The use of blockchain & IoT has ushered in the token economy where tokens will carry the economic value which can be a unit of utility or medium of exchange or even unit to express social value. This programmable money works to shift our economies from a single value model to a multi value model creating novel types of values & economies that is beyond the realm of traditional fiat currency. These changes will bring paradigm shift in functioning of our economy which is major concern for one special breed of people – the Central Banks of the world.
Central Bank in every country is the ultimate authority who is responsible for printing & managing the currency system of the country. Every country has their own money which is the blood and circulation of the economy which keeps the country running. Central Bank is the single & the highest authority who has control over this circulation. Now, let’s look at what internet has done to the human lives & changed the concept of money.
Today, value of almost any kind is defined, quantified and regulated by centralized organization.
The advent of Web 2.0 revolutionized the use & exchange of information within the society. Web 2.0 gave rise to Amazons, Ubers, Air B&Bs & Facebooks of the world. It had a disruptive effect on number of industries like hotel, transportation, newspaper etc. but it had no or very little disruptive effects to the Banking industry. This was because money still could not be transferred like the way information could be shared. You can digitally transfer a Powerpoint presentation, but you cannot transfer cash in similar way. This was so, until Satoshi Nakamoto invented Bitcoin in 2008 and solved the problem of ‘double spending’.
With the development of Blockchain, Web 3.0 is going to be a reality which will disrupt the centralized structure of organizations and engender the concept of distributed applications. So, what Web 2.0 did to information, Web 3.0 is set to do to recording & exchanging of all forms of quantifiable value. This idea of value lies at the heart of the Blockchain technology. Since the origin of civilization, the control of how value gets defined, measured & exchanged determined the source of power.
Today, value of almost any kind is defined, quantified and regulated by centralized organization. It could range from printing of currencies, recording land title documents, data ownership in Facebook, or national identification creation that resides with a central authority.
The fiat currency issued by the central bank is just a piece of paper and it gets its value from government’s backing and because people accept them as a medium of exchange. Until now because of low levels of trusted peer connectivity, we required centralized institution (central bank in case of money) to give values to these papers, maintain them, regulate them and this gave those organization a lot of power. Web 3.0 & Blockchain is going to change this concept.
The blockchain now enables us to create trusted & automated peer networks of exchange which enables people to negotiate & define values via direct peer to peer network. People can now set up their own currency with the value of currency depending simply on what others are willing to pay for it. These cryptocurrencies and the Non-Fungible tokens (NFTs) are going to create a whole new world of monetizing every aspect of human life.
This is going to be a game changer and central banks of the world are aware of it. Thus, this kindled Central Banks of the world to issue their own digital currency and lot of central banks around the world are doing their research, feasibility study while some are already in the proof-of-concept stage.
At home, Nepal Rastra Bank is doing their homework too and recently issued a concept paper seeking for inputs & feedback from all stakeholders on the Central Banks approach & CBDC design choice for Nepal. Nepal Rastra Bank Act 2002 does not give power to the Central Bank to issue digital currency and thus a task force has been formed to draft an amendment bill to authorize NRB to issue & manage digital currency which will be presented to the government to table in the parliament.
There is no reason why the Parliament will not approve this especially after Indian finance minister, Nirmala Sitharaman has declared that India will be launching their own CBDC by next financial year 2022-23. The ramification of the CBDC in the economy will depend on the type of CBDC, use of technology & policy around it.
Issuance of Indian digital rupee is bound to impact Nepalese economy as India is our largest trading partner and Indian cash is acceptable in all major centres of Nepal. With increasing use of digital currencies, growing digital payment infrastructure & possible uses of Indian CBDC (remember the banning of WeChat to make payments by Chinese tourists), our own CBCD can be a desirable tool to safeguard Nepal Rastra Bank’s monetary sovereignty.
A key piece of the fourth industrial revolution is the application of Blockchain platform which is already making inroads into various aspects of modern society. However, Blockchain’s application is yet to make any commercial inroads into the Nepalese business community for whatever reasons. In this backdrop, it is heart-warming to see Nepal Rastra Bank taking the first step in adaptation of this new technology.
While the use of Blockchain technologies from the business community of Nepal, either from the financial or non-financial sectors are yet to be make any commercial use cases, the old guard of the country’s financial system is getting their feet wet in the Blockchain technology and grappling with what it means for the country. This is a very welcoming step & encouraging one.
Imagine the Central Bank’s new monetary tool kit if they were enabled to issue a programmable money which can only be used for the intended purpose or are equipped with digital money that has an expiry date. Or consider a power of digital currency that can dissuade tax evasion, deter money laundering, broaden tax net, control criminal activities and even help the government to meet the social objectives like distribution of social payments.
So, the question now, is not about whether NRB will issue CBDC or not but rather it is about when will the regulator take the big leap. It’s an important question because it will have a major ramification and disruptive effects to the financial system & the Banking industry of the country.
The author is the Head of Transaction Banking at Standard Chartered Bank Nepal
(The opinion & views expressed in this article belong solely to the author. They do not purport to reflect the opinions or view of the author’s employer, organization he works for or any other organization)
