The race for central bank digital currencies has been on for some time now, and since the development of the digital yuan may have been postponed due to the coronavirus pandemic, other countries could beat China to the punch.
Almost exactly one year ago, the Eastern Caribbean Central Bank and Bitt Inc. — a financial-technology company based in Barbados — signed a contract to conduct a blockchain-powered CBDC pilot within the Eastern Caribbean Currency Union, an organization composed of Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.
Later this year, the project will enter its second phase and transition to a six-month rollout across the Eastern Caribbean region. So, does that mean that the ECCB has outdistanced China and other major contestants in the CBDC race?
“Not an academic exercise”
The original announcement was made on March 6, 2019, about two weeks after the ECCB and Bitt signed the contract. As per the statement, the CBDC pilot involved a securely minted and issued digital version of the Eastern Caribbean dollar, referred to as the DXCD, that would be released in all territories controlled by the ECCB.
The DXCD was intended to be used for financial transactions between consumers and merchants, including peer-to-peer transactions, and would be available to use via smartphone devices. For example, an individual in Anguilla would be able to send DXCD securely from their smartphone to someone in Grenada. The press release stipulated that such transactions would, purportedly, take seconds and entail no fees.
The governor of the ECCB, Timothy N. J. Antoine, emphasized at the time that — in contrast to previous CBDC research and experiments — the ECCB was being especially ambitious with the project:
“This is not an academic exercise. Not only will the digital EC Dollar be the world’s first digital legal tender currency to be issued by a central bank on blockchain but this pilot is also a live CBDC deployment with a view to an eventual phased public rollout.”
After signing the agreement, the ECCB embarked on the DXCD pilot. There were two predetermined phases: development and testing, followed by rollout and implementation in pilot countries for about six months. Although the first phase was initially supposed to last only around 12 months, the ECCB informed Cointelegraph that rollout wouldn’t occur until sometime between June and December.
As for the technical aspect, a Bitt spokesperson explained to Cointelegraph that the ECCB project is based on Hyperledger Fabric, but added that “our architecture allows our solution to be blockchain agnostic.”
DXCD: A financial tool to interconnect ECCU states
As an ECCB representative told Cointelegraph, the rationale for a digital EC dollar is “centered around policy goals of financial inclusion, competitiveness and economic growth.” The ECCB’s 2017–2021 strategic plan aims to “ensure a strong, diversified and resilient financial sector,” reduce cash usage within the ECCU by 50%, and “actively promote the economic development of our member territories.”
The method of issuance and redemption of DXCD will follow the conventional principle of creating central-bank money, the spokesperson added. Financial institutions will “purchase” DXCD, similar to how EC banknotes and coins are purchased, and make it available to their customers.
However, cash is still the most accessible means of payment in the ECCU, the official told Cointelegraph, which is why the ECCU economy is predominantly paper-based. The DXCD pilot project will, in turn, provide a “more secure, cheaper, faster platform for making EC payments and transfers with the ECCU.”
But is a central-bank digital currency indeed the most efficient way to modernize the local economy? Some specialists refrain from such assumptions. John Kiff, a senior financial sector expert at the International Monetary Fund, explained to Cointelegraph that the IMF Article IV Selected Issues Paper on the topic suggests that the jury is still out, and that IMF staff remain skeptical about the effort. He added:
“The SIP notes that the ECCB could instead (or in addition to piloting the DXCD) continue efforts to improve the traditional payment system in order to pursue the goal of modernizing its payment system. In that regard, the paper recognizes that a CBDC may not be as potentially redundant in the Eastern Caribbean Currency Union as it would be in a larger economy where a CBDC could be viewed as redundant to existing private sector e-money or mobile payment services.”
Kiff also added that the paper crucially notes that if the ECCB goes ahead with the DXCD pilot, it should employ a cautious approach, conducting a comprehensive cost–benefit analysis of the proposed ecosystem before launching it.
DXCD looks similar to the Bahamas Sand Dollar, experts say
Contrary to the ECCB governor’s remarks, the digital EC dollar might not be the “world’s first digital legal tender currency to be issued by a central bank on blockchain.” The most well-known competitor in the CBDC race is the People’s Bank of China, which successfully completed the top-layer design and testing of the digital yuan back in January, according to media reports.
However, Kiff noted that the PBoC’s progress with its CBDC might have been overestimated. The last public announcements about the digital yuan from the Chinese central bank occurred in August 2019, when it said that it will “accelerate the research and advancement of China’s central bank digital currency,” and in November 2019, when it denied rumors that the digital currency launch was looming. Moreover, the coronavirus pandemic — which originated in China — might have taken its toll on the CBDC’s production. Kiff added:
“Since then there have been various news reports purporting that a pilot had taken place, or would soon do so, but I’ve seen no direct evidence of that, and I suspect the coronavirus crisis has stalled any such efforts.”
Alex Batlin, the CEO of the cryptocurrency-custody platform Trustology, agreed that “one shouldn’t underestimate the impact of the coronavirus.” He added that “so far, reports suggest that China’s efforts are on hold as policymakers and research staff are required to isolate.”
Sale Lilly, a China policy analyst and professor of blockchain technologies at the Rand Corporation, a nonprofit global policy think tank, confirmed to Cointelegraph that the coronavirus has delayed the PBoC’s development of a digital renminbi, although the CBDC’s digital narrative seems to have extra appeal during the pandemic:
“I think it is possible that there may be a hygiene narrative to the embracing of a digital RMB (like e-pay systems), but for now, like most of China’s financial and technological efforts, the coronavirus has delayed efforts like a CBDC but not stopped them.”
In any case, Batlin believes that China’s CBDC is poised to be far more significant in terms of economic displacement, as it represents a reserve currency with ambitions to supplant the United States dollar’s dominance. Batlin told Cointelegraph:
“China — along with other BRIC nations — has been working steadily to reduce its reliance on the USD and liberalize its currency for international trade and business. We’ve seen this aggressively take shape with its off-shore renminbi centers across Europe and Asia, as well as a digital acceleration to a cashless society within Alipay and WeChat.”
According to Kiff, although the PBoC “appears to be the frontrunner among central banks in major-currency countries,” a number of other smaller countries — namely Uruguay and the Bahamas — seem to be ahead of it:
“Uruguay has already completed its e-Peso pilot which it reported as being very successful (see chapter 7 in this SUERF publication) and they are apparently mulling over whether to go live. The Central Bank of the Bahamas (CBOB) has launched its Sand Dollar pilot in December, and the ECCB plans to launch their pilot shortly.”
Kiff argued that — based on the publicly available information — the ECCB DXCD project looks very similar to the Bahamas Sand Dollar, as it runs on the blockchain-based Hyperledger Fabric platform with transaction and holding limits linked to Know Your Customer, Anti-Money Laundering profiles and Combating the Financing of Terrorism regulations. Batlin believed that the ECCB seems to be in competition with the Sand Dollar in particular, elaborating:
“This could drive off-shore funds to use that currency. It’s also worth noting that the EC Dollar will be retail CBDC by nature, i.e., it will be distributed to the public. As such, intermediaries will be required to provide on-ramp and off-ramp services to retail users.”
According to Piers Ridyard, the CEO of Radix DLT — a provider of a decentralized ledger built without blockchain — Singapore is the main contender to issue a CBDC before China and have it meaningfully impact its economy. He specified that the impact will be seen “in financial markets as a settlement instrument, rather than in the consumer facing markets.” As for the Carribean nations, Ridyard believes that it is meaningless to compare their CBDC endeavors to larger economies, due to internal complexities and the popularity of cash. He added:
“Transferring money into and out of the Caribbean nations is still difficult, and in many cases, subject to currency controls. This will make the on-boarding and off-boarding of any CBDC difficult in the region, and the governments there will be faced with the tricky prospects of relaxing FX and currency flow restrictions on the newly issued currency, or forcing their trading partners and larger businesses to continue to work with the US dollar or euro via off-island bank transfers as they do at the moment.”
For this to have an impact at a grassroots level, large parts of the island economies will need to move from cash to digital payment methods, Ridyard added. It might take longer than the actual time frame for a CBDC release, since it will “require behavioral change, which generally takes longer than the technology change.”
“This is not a race”
Despite the hype around CBDCs and stablecoin generated by Facebook’s Libra project, the ECCB and Bitt don’t seem to be in any rush. “This is not a race,” a Bitt spokesperson explicitly told Cointelegraph via email:
“ECCB was first to announce their CBDC pilot, certainly. Bitt and the ECCB team are focused on getting the DXCD pilot right, not on winning any races.”
Currently, the pilot is still in its testing phase. However, a representative from Bitt went further in providing an estimate for the release date, echoing the statement by ECCB that the project has not been postponed:
“The project is currently on schedule with all DXCD applications currently in testing with select stakeholders ahead of our planned start in June 2020.”
Meanwhile, the region is seeing more crypto-positive changes. Last week, the ECCB-established Eastern Caribbean Securities Exchange announced a partnership with Canada-based firm Blockstation — a provider of digital-asset marketplaces — to pilot the trading of security token offerings, Bitcoin (BTC) and Ether (ETH).