Reading Group - CBDCs Expansion

**The Engagement Team is hosting a reading group this Friday (4/29) at 1PM EST to discuss the benefits, risks, and opportunities of CBDCs.

Here is a link to the meeting:https://calendar.google.com/event?action=TEMPLATE&tmeid=N211a3Y1b2FvdXRrMTd0M3VzaTRuNGxmbDQgY184dGxpY21haTB2Y21sdTczNmxhdDdoajBwa0Bn&tmsrc=c_8tlicmai0vcmlu736lat7hj0pk%40group.calendar.google.com

Central Bank Digital Currency (CBDC) is gaining global traction as more countries are seriously considering adopting it in hopes of increasing efficiency and deepening financial inclusion, transparency, and accessibility for customers. However, many are unconvinced of its promises…

Here are threads in Forum that will be referenced in the discussion:
Smart Contract Summit 2021 - Smart Contract Summit 2021: Central Bank Digital Currency (CBDCs) and Blockchain Panel.

Economic Design of Stablecoins - Research Summary: On the Economic Design of Stablecoins

In the news:
Edward Snowden on CBDC’s Your Money and Your Life

World Economic Forum white paper series (skim): https://www3.weforum.org/docs/WEF_Digital_Currency_Governance_Consortium_White_Paper_Series_2021.pdf

What is a reading group?
It’s a meeting for the SCRF community to gather and discuss specific readings that help enrich the Forum’s research landscape.

Where does it take place?
In the past, we had two formats—a discussion thread on forum and discussions on google meet. This one will be a hybrid! We will chat in an uncompensated hour-long meeting, but any time spent on posts to the reading group forum will be compensated.

How does it work?
We will suggest a specific thread or two on SCRF’s forum related to the topic along with a couple of specific current news items. These will be the primary texts for the discussion, though we welcome any other related links that you wish to share in advance or during the discussion. We hope that participants will arrive ready to share their comments and questions.

Why?
SCRF’s research isn’t static. We want our forum topics to be living discussions that encompass ongoing developments in the web3 space and inspire continual thought on timely questions.

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Here’s an interesting news story that we could add to the discussion – https://twitter.com/BitcoinMagazine/status/1518959567106945024 apparently the Central African Republic is preparing to allow cryptocurrencies to be used. @Larry_Bates - I’d love to get your thoughts about this before we kick off the meeting

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After doing some brief research, it seems that the Central African Republic has a great opportunity to build out their CBDC in tandem with the internet infrastructure. It seems that they only have 11.4% internet penetration, so in that context a CBDC would only be truly viable if they dramatically build out their infrastructure. On the one hand that is a great opportunity to shape the culture in a way that digital currencies and digitally oriented operations become the standard. On the other hand, trying to execute a CBDC in tandem while building out the internet infrastructure may be met with a lot of resistance on the ground level.

I think this project has a lot more likelihood of success if the locals are involved in the development. Further, if government programs are funded through CBDCs and distributed digitally it may have a higher likelihood of continuous usage instead of just releasing the CBDC and expecting people to adopt it voluntarily with no guidance. As the Central African Republic population is not huge, this experiment then has a better chance of success. As more CBDCs are launched, it will be great to have the regional and national case studies broken down so we will be able to see what works and what didn’t work between cultures.

Edit: There seems to be some conflicting reports on what is actually happening in the bill, so I will update this comment in the next few days after the reports are settled.

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When the U.S. and its allies decided to punish Russia for its invasion of Ukraine, they used their power over the global financial system to isolate the nation, crippling its economy and crushing the value of the ruble. But what if, in the future, countries don’t need those U.S.-dominated payment networks?

That’s one of the big questions also being asked now about China’s digital yuan and the European Central Bank’s plans for a digital euro, just two of the many so-called central bank digital currencies (CBDCs) that are being tested or studied around the world. CBDCs have emerged amid the rise of thousands of cryptocurrencies, which are quickly disrupting traditional payment systems and pushing central bankers to innovate to compete.
What are our thoughts on this?

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The implementation of CBDC is far more complex from the policy and economy’s perspective. Overall, CBDC brings some interests to the individual and institution regarding the flow and free trade of money and goods. However, those systems (modern financial systems like SWIFT, for example) have existing stakeholders involved that take advantage of a centralised system to control the financial market we see and use today. Therefore, if we genuinely want to create a fair and fully decentralised global financial system, we must consider these factors and consider those stakeholders further to construct a comprehensive, modernised financial system.

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What do you think influences a country to choose a CBDC rather than something like Bitcoin? Are there significant differences between the Central African Republic and Nigeria that would make one or the other more appealing? In our last CBDC discussion @Legalpreneur talked about how high inflation was one of the motivations for the eNaira, and that Bitcoin was contributing significantly to the problem (in that people were stashing their depreciating money in BTC as soon as they could or receiving remittances in BTC instead of converting it).

Any thoughts on why the IMF has been so against adopting BTC?

Also adding a link to a story about Bahamian CBDCs.

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@Mark-Chen, I agree on the complexity from a policy and economic standpoint and have not considered how systems like SWIFT will approach this trend. There’s a download from the SWIFT site that spells out some impacts, opportunities and challenges that CBDCs will have on payments between nations and institutions: Exploring central bank digital currencies: SWIFT and Accenture publish joint paper | SWIFT - The global provider of secure financial messaging services. One element that was discussed in the 4/29 meeting that is addressed here is privacy protocols. While we discussed what they may look like for the U.S. and nations with similar infrastructure/monetary frameworks, we didn’t discuss this impact from an exchange angle. I imagine privacy protocols of one CBDC will influence that of another if it impacts the likelihood or monetary limits of a transaction taking place.

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Hi,

Based on my understanding of both categories of digital assets, the determinant factors for CBDC adoption are:

  • Macroeconomics status of the nation
  • Its dependence on the current USD-based traditional finance infrastructure
  • Challenge of money laundering.

For example, taking developing countries like India, current asset classes ( like reserves of metal and other derivatives, traditional securities, and bank deposits ) are in significant amounts and currently not giving enough sufficient returns to the government and are at risk of being undervalued via inflation. these assets can be tokenized with a federal blockchain consortium of central and private banks, and this supply can then be provided directly to the corresponding citizens who want to essentially convert all of their bank deposits into the CBDC with the management using the wallet. this means that there will be a single denomination of your account based on whatever bank in which you have your account.

This is a boon for citizens who want to push the banks to hold more accountability in auditing the overall available assets transparently on blockchain, including the nonperforming assets. also, the wholesale CBDC will make essentially the root of trust to the central banks, this

Constraints of analyzing the Bitcoin adoption:

Personally, I am not pretty enthusiastic about the use of BTC, unless there is a better understanding of the current bitcoin market with derivatives, which has been a major issue due to lack of transparency by the intermediate markets in giving actual reserves of bitcoins and assets used to create the derivatives.

Also the challenges about potential manipulation of the lifecycle of bitcoin nodes, and validators being able to collude in mining the duplicate / redundant transactions in order to prioritize someone (also called Miner Extractable Value) are some of the technical challenges that are still prevalent in the DeFI ecosystem but will be pretty challenging for the government to quantify the risk associated with major black swan events.

And the last and most important is asset stability, checking the price fluctuation of the deposits of the core assets (minerals ) and using tokenized as wholesale CBDCs are more stable vis a vis traditional BTC payments. doing market-making for FX will become challenging while using BTC as the store of value.

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