“Central Bank Digital Currencies” (CBDC) are slowly spreading. China’s DCEP is the big example, Nigeria is following suit with the eNaira, and most of the world’s central banks are flirting with a CBDC. Is the empire now fighting back? Or are all the projects just the same old monotony in a trendy shiny wrapper?
The flagship project for digital central bank money comes, like so much anti-freedom currently, from China: the eCYN, also called DCEP, eYuan or digital Remnimbi.
The central bank has been planning the digital currency since 2014. Last year it was officially launched, first in selected cities, then more and more throughout the country. True, the DCEP is officially still in the beta and testing phase. But this phase has already gained considerable reach.
In the meantime, the central bank recently reported, about 140 million people have created a wallet. Around 62 billion yuan – that’s just under 10 billion dollars – have already been transferred with eCYN in 150 million transactions, it says; 1.55 million merchants accept the currency.
Compared to June, this is a huge step forward. At that time, only 24 million Chinese used the digital currency. However, they have already transferred 34.5 billion yuan, which means the growth in volume is not keeping up with that of users.
An authoritarian-painted remake of old technologies
What specifically is the DCEP? A blockchain currency like bitcoin? A private or public blockchain? A construct like hyperledger? Or something else entirely?
The eYuan is apparently not based on a blockchain. However, it uses digital signatures as well as encrypted messages to process transactions, but no blockchain. Double spends are prevented not by a decentralised consensus algorithm, but by the central bank keeping a central database. This sounds like old technology that PayPal and other electronic payment service providers have been using for a long time, but which is now slipping from the market into the polity under the mantle of digital currencies.
Quick-witted and the face of the new tyranny: China’s leader Xi Jinping.
But in doing so, China seems happy to take inspiration from that free market that the government is trying to ban. Thus, the yuan are created as tokens that carry a standard data structure. This is what DCEP has in common with blockchains like Ethereum. However, unlike cryptocurrencies, the data structure contains not only information about the transaction and token, but also about the user’s ID. This information is updated in the central bank’s database with each transaction. Thus, by retrieving a token, it can trace all past transactions.
Thus, the DCEP is a step backwards behind current technology and more like a modernised, authoritarian-painted remake of the digital cash that was experimented with in the 90s.
Compared to cryptocurrencies, the eYuan inverts the relationship between transparency and privacy: Where cryptocurrencies are transparent by publishing all transactions, DCEP remains private because the transactions only end up on the servers of the central bank and its partners; whereas cryptocurrencies are private if they only know pseudonymous addresses but no identities, the Chinese digital currency becomes transparent because it also stores identities. In short, China is gutting the libertarian potential of cryptocurrencies.
P2P, but not without middlemen
Nevertheless, the eYuan could be a step forward from the status quo. Transactions can probably also be P2P, i.e. flow from person to person, and partly also pseudonymously. However, the central bank plans to use artificial intelligence and big data analyses to thoroughly analyse the financial flows.
With the DCEP, the government wants to push back the influence of private payment service providers like WeChat Pay or AliPay, whose growing volume of digital payments it has eyed with growing envy for several years. Still, the eYuan does not eliminate all middlemen. To open a wallet, citizens must register with a bank or other provider.
Wallets come in different varieties, graded according to privacy. This ranges from a wallet for which one can only register with a telephone number, i.e. almost anonymously, to a wallet for which one can only spend a maximum of 5,000 yuan in one transaction and 50,000 yuan per year. Wallets without such limits are possible, but can only be created at banks after a complete verification of identity.
Interestingly, the control seems loose enough to be attractive to money launderers. At least there are initial reports of police arresting people suspected of laundering money with the DCEP. However, they probably did not expect the Chinese state to catch everything that happens with the digital currency.
Smart contracts, hardware wallets, ATMs
Although the eYuan has little to do with a true cryptocurrency like Bitcoin, it is a significant modernisation of traditional central bank money. This is evidenced by its ability to adapt the innovations being hatched in the crypto universe. For example, in July, the central bank published a whitepaper stating that the eYuan will become smart-contract-enabled.
The eCNY is also similarly flexible as real cryptocurrencies when it comes to the options for storing the tokens: Software wallets, hardware wallets or secure microchips are possible. Without a doubt, blockchains and cryptocurrencies were inspiring in forming a currency based on asymmetric cryptography.
despite China’s active testing of the digital currency. eCNY wallets have been accepted by 1.55 million retailers as of this writing. Utilities and catering, transportation and retail are among the other businesses that Mu cites.
– USFCX Center (@usfcx) November 9, 2021
And just as special ATMs are necessary and in demand for cryptocurrencies, China is installing more than 3,000 ATMs specifically for DCEB. At these, one can exchange the digital yuan for cash and vice versa.
How China is promoting the eYuan
When China initiates a project, the government usually does not hesitate to push it forward by any means. It also likes to give away money to do so. A giveaway in the form of lotteries in six cities is to demand the spread of the DCEP. Since October 2020, the central bank has already distributed more than $40 million worth of eCNYs.
Arguably, a milestone was when local retail chain JD.com began accepting the currency for online orders, paying suppliers as well as employees. In addition, electronics company Huawai also unveiled a prototype to use the eYuan to pay for a room in a hotel without staff.
Oh, just China e-yuan being used & compatible with XPOS point of sale 🔥 pic.twitter.com/D1ebdMP9eS
– smacker (@SmackerAim) January 9, 2021
To make the digital yuan attractive to travellers, China’s central bank has unveiled a prototype machine that allows 16 foreign currencies to be exchanged for the e-CNY. This will allow Chinese returning from abroad to put their banknotes into the machine and receive a physical e-CNY card in return, a kind of hardware wallet that can be used at retail outlets. This machine is to be used in February 2022 at the Winter Olympics in Beijing and will presumably warm up guests from abroad to the currency.
China is also already gaining allies outside the country with the digital currency. For example, the country has teamed up with the United Arab Emirates, which is also planning a digital currency to form a global payment network based on CBDCs. In addition, the Innovation Hub of the BIS (BIS) and the central banks of Hong Kong and Thailand are part of this network.
A “springboard for total financial population control “
The Competitive Enterprise Institute (cei.org) is clearly suspicious of the success of China’s DCEP. It says digital currency “poses a serious threat to global freedom.”
This is because the DCEP is intended not only to complement existing technology, but also to replace it. The increasingly forceful ban on Bitcoin and cryptocurrencies could show that China does not tolerate a coexistence of private and state-owned digital currencies. With this move, the government is also ensuring that the talent pool capable of working with digital currencies does not spend itself in excellently remunerated private projects, but is preserved for state projects.
The CEI finds the government’s plans to ban cash domestically and allow DCEP as the only legal means of payment worrying. Even more worrying, however, are the ambitions of global reach that China is pursuing with DCEP. The country wants to export the model worldwide through international standard-setting organisations. If successful, CEI says, “this will jeopardise cryptocurrencies’ promise to empower individuals.” And, one might add: Into its opposite: Into the money that the tyrants of this world love.
With DCEP, China is reacting above all to the success of private payment providers such as WeChat Pay or AliPay. Through digital currency, the government and its authorities want to regain control over payments. Private innovation is good as long as it is useful, but in the long run it flows back to the public sector to strengthen it. Private entrepreneurship and economic freedoms are only a means to an end and will be gladly rewound when it is achieved.
Internationally, DCEP is to become the “springboard for nothing less than total financial population control and global adoption of the system by central banks”. If Bitcoin is the money of freedom, then DCEP is the money of digital tyranny.
And unfortunately, the example of China is setting a precedent around the world.
Nigeria introduces eNaira
The number of countries planning a CBDC is almost unmanageable. Allegedly, 80 per cent of all central banks are planning a digital currency, and even the “central bank of central banks”, the BIS (Bank for International Settlements), together with the World Bank and the International Monetary Fund, is dealing with the topic.
Surprisingly, a pioneer is the Central Bank of Nigeria, Africa’s largest economy. It has recently issued a digital currency, the eNaira.
Nigeria’s President Muhammadu Buhari. Image by U.S.
The eNaira was launched by President Muhammadu Buhari in late October. It is said to be the only digital currency allowed as an official means of payment in Nigeria and accepted alongside cash.
At the launch, the central bank introduced an electronic wallet. These wallets have limits on account balance and transfer size. According to the FAZ, these caps are intended to prevent mass withdrawals of giro money from bank accounts, which could lead to the collapse of the financial system. An API from the central bank allows banks, payment service providers and fintechs to integrate the digital naira into their infrastructures.
According to the FAZ, the digital currency has various advantages for Nigerians: remittances – including and especially international remittances – no longer need middlemen, which extremely reduces fees, for example when guest workers send money to their families at home. Social assistance can also be paid out directly with the eNaira.
A real blockchain after all
The eNaira was not developed by the Nigerian central bank itself. Presumably, the institution couldn’t do that at all. Instead, it commissioned the startup Bitt to do it. Bitt is based in the Caribbean, specialises in enabling blockchain-based CBDCs and is also working on a digital currency for the Eastern Caribbean Central Bank, among other things.
Bitt offers a “Digital Currency Management System (DCMS)” that is already used by several financial institutions in Central America and the Caribbean. It uses blockchain technology to “empower people by giving them available, cheap-to-use and real-time payments” and “supports the digitisation of the economy”. You can think of DCMS as a software suite through which central banks can plug’n’play to create a digital currency.
DCMS lowers infrastructure costs while improving access and the user experience of transactions and promoting financial inclusion. The system is already so mature that the “Monetary Authority Suite” is, according to the website, allowing central banks to “pilot their digital currency from scratch.”
Currently, digital currencies run on Bitt’s software based on Hyperledger Fabric. This is the blockchain created by primarily IBM as part of a Linux initiative, which is aimed at commercial uses, such as in supply chain management. Hyperledger Fabric is a private, closed blockchain that runs in the databases of the participating partners. Whether this is only the central bank in Nigeria, or also banks, is unknown to me.
In industry, Hyperledger is well received because the software allows companies to take some of the benefits of blockchain without venturing the transparency and openness that comes with public blockchains.
In the future, Bitts will also enable digital currencies based on Stellar. This would already make currencies a bit more decentralised, transparent and autonomous. If Stellar were to become the basis of different CBDCs, they would also be natively compatible, instead of being mediated via an interface between different private, locked Hyperledger servers.
A good start
Overall, the eNaira seems to be doing surprisingly well. A few days after its launch, the consumer wallet has already been downloaded almost 400,000 times, and the wallet for merchants almost 60,000 times.
The app was briefly blocked in the Android Play Store. The central bank denied rumours that this had happened because of too many negative reviews and justified it with updates and improvements.
The reviews in the Play Store are indeed very mixed. But on the whole, the app seems to be working and also attracting considerable interest. According to the governor of the central bank, Godwin Emefiele, 33 banks and 120 traders have registered on the platform after only two days.
There is also a lot of interest outside Nigeria. The apps have already been downloaded in more than 100 countries.
From Grenada to Ghana to India
China and Nigeria are leading the world with the CBDC. But they are far from the only countries planning or soon to release a digital currency.
For example, as mentioned, Bitt is working with the Central Bank of the Eastern Caribbean Currency Union. Titled DCash, the project aims to launch a digital currency in Antigua and Barbados, Grenada, Saint Kitts and Nevis, and Saint Lucia in the near future.
In Africa, Ghana is also working on a CBDC. Actually, the currency was supposed to be launched in September. But the launch is delayed while Ghana is still developing offline payments.
Australia, Singapore, Maylaysia and South Africa are working together to process cross-border payments with a CBDC. In Central America, Honduras and Guatemala are currently working on a CBDC, while India has announced that it may test a digital rupee as early as December.
Surprisingly, it is the most developed free economies that are far behind in terms of CBDCs. Both the US and the EU have plans and declarations of intent, but these have so far remained vague, reaching at best, as in France, niche pilot projects. Fortunately.
