There’s no rulebook for how a central bank should set up its own digital currency. It’s trial and error. So far, it’s been mostly errors, with early retail CBDCs issued by the Bahamas and Nigeria disappointments. China is enjoying more success with a slow, thoughtful series of pilots, but also one seemingly without end.
Alexander Feenie and Hubert Knapp, two experienced consultants, have teamed up to help central banks make their digital currencies relevant. It’s a big task, one that central banks are not used to: getting everyone else in their society to want to participate in the introduction of a central-bank digital currency.
Knapp puts it in consultant-speak: “Multiple integration points are going ignored in the CBDC end-to-end value stream,” he said. “Having the central bank choose a protocol provider is just the start. They need to think about the downstream.”
That means integrating CBDCs with commercial banking systems and businesses, incorporating them into how large corporations operate, winning merchant acceptance, and getting the general population to trust them.
Feenie has consulted in-house on supply-chain, finance and other operations for Apple and Porsche, among other multinationals. Knapp has done digital-transformation projects for banks worldwide, notably in Southeast Asia. They are co-founders of Chavanette Advisors, a Hong Kong-based consultancy, funded by Feenie, that is assembling the tools required for a full-fledged CBDC effort.
The name of the company hints at the scale of the challenge. “La Chavanette” is a difficult and steep piste along the Swiss-French border. But at least at La Chavanette there’s an existing ski run in place. With CBDCs, the task is not only daunting but it’s entirely off-piste.
Start with what isn’t working.
The Sand Dollar in the Bahamas is the first retail CBDC to go live, in 2020. The Central Bank of the Bahamas issued it to increase financial inclusion, improve domestic payments, to blunt the popularity of unregulated crypto, and to bring more transparency to financial dealings (to clamp down on tax evasion, for instance).
After two years, though, only 1 percent of the nation’s roughly 400,000 people use it. Vendor Movment (formerly known as NZIA) helped build the platform using distributed-ledger technology. The focus was on providing wallets to users, accessible via prepaid Mastercard (physical cards, or app), with all transactions operating among cardholders. No ID is required for the basic tier, but to use larger sums requires background checks, so there is no anonymity.
In theory, all payment processing systems can settle payments via the Sand Dollar’s rails. But few merchants have bothered. Commercial banks were excluded from the project, so they haven’t done any integration work. Consumers have been put off by the traceability.
Nigeria’s e-Naira, launched in 2022, has faced similar problems. Also built on blockchain – the open-source Hyperledger Fabric – it is nonetheless completely centralized, with all nodes operated by the Central Bank of Nigeria. This begs the question of why bother with blockchain at all: a blockchain CBDC could be programmable, but the e-Naira bears no interest nor has other functions, at least today. It’s meant to be just like cash.
CBN did a better job of integrating the e-Naira into commercial banks’ payment rails, but there’s been no merchant adoption. Crypto is very popular in Nigeria, but often as a tool for tax evasion, money laundering, and other criminal behavior. The e-Naira is traceable and designed to combat such activity. Most Nigerians prefer to stick to crypto.
Taken together, the Bahamas and Nigeria show, first, that emerging markets are vulnerable to crypto’s siren song. They have weak financial systems marred by high fees and poor service. In such environments, people will use even the clumsy mechanisms of crypto to skirt commercial banks. This represents a tragic leaching of information to banks or authorities regarding taxable income, fraud, and general control over the currency.
- Read more:
- Ripple looks to Asia for growth in blockchain finance
- Partior aims to become the world’s ledger for banks
- BSN is building blockchain future without the crypto
In this context, CBDCs can be an important means of restoring national sovereignty. They can also enhance the credibility of the government by, for example, enabling direct payments of pensions or aid to recipients, cutting out intermediaries and making sure money gets to where it belongs.
But when a CBDC is designed simply with the central bank’s agenda in mind, it goes nowhere. Central banks need to go beyond merely choosing a vendor that helps provide the CBDC rails, and think about how to get their citizens and businesses to want to use their digital currency.
“Central bankers aren’t commercial bankers, and they don’t think in business terms,” Feenie said.
Chavanette Advisors is building a range of services in a bid to put itself at the heart of a long, 10-plus year transformation, assuming that more central banks will want some form of CBDC.
Feenie and Knapp don’t see the first examples of retail CBDCs as evidence that the concept is unsound, but merely as the first iterations of the future of M0 money supply.
They have built out a platform for exchanging stablecoins and CBDCs, a consulting service to help central banks connect with downstream users, and a control center to train teams at central banks to operate and risk-manage CBDCs. They are working with GFT, a consultancy, that provides systems integration.
The company helped to launch the Universal Digital Payments Network in January, as a payments messaging infrastructure for regulated stablecoins and, eventually, CBDCs. The platform intends to host regulated stablecoins such as those issued by banks such as MUFG, NAB and Societe Generale. Circle’s USDC is also present as an unofficial US dollar representative. Red Date Technologies, the company behind a Chinese blockchain initiative, and GFT built the network with Chavanette managing the project.
A hot topic in Hong Kong is the possibility of an e-HKD, which would receive a boost if China’s e-CNY starts to be used for international trade. Feenie and Knapp declined to comment on whether an e-HKD would join UDPN but they note the platform is designed to serve as payment rails for CBDCs once they emerge.
It’s possible that the e-HKD could be the first formal CBDC to join the platform, depending on whether the Hong Kong Monetary Authority decides to issue one; it is drafting regulation but the specifics remain confidential.
Feenie likens UDPN to a new version of SWIFT, the correspondent-banking messaging network.
It’s also competing with Regulated Liability Network, a Citi-inspired group trying to connect liabilities (including money itself) among banks looking to hone their risk management, with smart contracts powering transactions.
Another competitor is Singapore’s Partior, a fiat-stablecoin FX exchange backed by DBS and J.P. Morgan – and it’s notable that J.P. Morgan’s in-house JPMCoin is not on UDPN. The difference is that J.P. Morgan’s focus is on tokenized deposits, which act as de-facto bank accounts on blockchain, rather than rely on stablecoins to vouchsafe money.
UDPN is involved with 14 proof-of-concepts with banks and Big Four auditors, testing transactions, reporting, and governance, which is decentralized among members.
Despite the network’s decentralized setup, the individual projects are not on blockchain, says Feenie. If there’s one takeaway from the Bahamas and Nigeria, it’s that central banks will operate CBDCs on centralized platforms, using standard relational databases. They need to maintain control.
Along with the network, Chavanette is promoting consulting services to give central banks a holistic approach to CBDC design and rollouts, and promoting an administrative center to give central banks’ people a physical space, resembling a NASA control room, where they can monitor CBDC flows, learn how to mint and burn tokens, check for risks, and handle cyber vulnerabilities.
Bundled together, the thrust is to get central banks to run live pilots. If they just work behind white papers and proofs of concepts, they aren’t going to learn how CBDCs work in the real world. They need to combine pilots with a way to sell the idea to ordinary people and businesses. That requires experiments in the wild, not just assuming people will embrace decisions made on high.
“Doing pilots, not just PoCs, provide insight into operations, risks, accounting, systems performance, and cybersecurity,” said Knapp. “They need to be ringfenced, but they provide real learning.”
For example, Chavanette is pitching one central bank with the idea of using a local university campus as a petri dish, moving on-campus vendors and services onto a CBDC whose use is limited to the university grounds.
This has echoes of community currencies, such as IthacaHOURS and the Brixton Pound, scrip issued by a township to support consumption among local merchants. Except in this case, the experiment represents a direct claim on the central bank’s balance sheet.