Central Bank Digital Currency: a new form of money

There is talk of CBDC almost all over the world. The moment Central Bank Digital Currency (CBDC) is deployed, it will have a huge impact on each of us, every business and institution you name. Currently, we trade or pay for something in cash or non-cash money. We can see, touch and hold cash, but with non-cash money you need to use a PC, mobile phone or tablet without physical contact with the money. CBDC is the third form of money to be digital, which means it can be traded just like non-cash money. Its purchasing power will be exactly the same as that of Taka. In fact, both non-cash money and CBDCs are digital. So, why the push for CBDC?

At present, the size of the black market in Bangladesh is significantly larger compared to Bangladesh’s tax revenue. On April 11, 2023, Dr Jamaluddin Ahmed, FCA, speaking on the topic of the CBDC in his presentation at a local hotel in Dhaka, commented on the business case and concerns about CBDC, the need to transform the informal economy into a formal one, economic impacts and risks, technical design of a CBDC, as well as legal issues that need to be considered by the Central Bank. He stated that “Bangladesh has lost nearly $50 billion in six years due to illicit trade-related financial flows. The size of the informal economy could shrink by 16.1 to 21.8 per cent if Bangladesh can increase digital payments by 20 per cent.” There are other forms of the black market that also cause the government to lose tax revenue. A cashless economy can help the government increase tax revenue by using either non-cash money or CBDCs.

There is a fundamental difference between non-cash money and CBDC. Central Bank Digital Currency (CBDC), which requires every person who will use CBDC must have an account with the Central Bank of Bangladesh. Until now, no one can have an account with the Central Bank. In its current form, the Central Bank cannot offer a CBDC because it will need a different type of platform to serve millions of people, sophisticated hardware and software, experts to develop policy, architecture, strategy and more. Moreover, the Central Bank and the government must determine the role of other banks, otherwise they will go bankrupt.

The use of CBDC will allow the government to collect information about every transaction, person and enterprise, increase transparency, increase tax revenue and monitor money laundering. Basically, the more money the government raises through taxes, the better for most people, as the taxes go towards building schools, hospitals, roads, highways, and various infrastructure.

Bangladesh will have no choice to ignore the CBDC if the US, China, Russia, the EU and India proceed with the CBDC. In November 2022, the Federal Reserve Bank of New York announced the successful completion of a test that included the use of CBDC for wholesale cross-border transactions, the exchange of a digital US dollar for experimental foreign currencies on separate blockchains. The test significantly improved the current average time required to clear and settle transactions, reducing it from two days to less than 15 seconds. There are several opponents in the US: Gov. Ron DeSantis is considering a law in Florida banning the use of the Fed’s digital currency (CBDC).

In 2021, China piloted CBDC in several provinces with a population of 150 million. Moreover, they used CBDC during the 2022 Olympics. China has demonstrated 10,000 transactions per second (TPS) and is capable of 300,000 TPS, faster than Visa (1700 TPS).

European Central Bank President Christine Lagarde said the EU will pilot test the Euro CBDC by October 2023. Russia has completed testing of the CBDC and planned a pilot launch in April 2023, however, due to the need to clarify some issues, it has postponed the deployment. India launched the Digital Rupee-Wholesale Pilot on November 1, 2022 and the Digital Rupee-Retail Pilot on December 1, 2022 within a closed user group consisting of participating customers and merchants. SWIFT announced that its recent experiment to test a solution linking central bank digital currencies (CBDCs) was a success.

Currently,114 countries, representing more than 95 per cent of global GDP, are exploring (development, pilot, or launch) a CBDC. Nigeria, Africa’s largest economy, launched its CBDC, known as eNaira in October 2021. For several months only around 0.5 per cent used eNaira. However, after pressure and intelligent tactics, Nigeria has achieved the use of eNaira by 63 per cent.

A cashless economy will have many more benefits for the government of Bangladesh, whether it be traditional digital currency (non-cash money) or CBDC. Digital Taka (eTaka) will make payments faster, easier and more secure. For example, suppose someone pays 3 lakh in cash to an agent for setting up his son to work in the Middle East, suppose the agent also collected money from 30 other families to provide similar services. At the end, the agent disappears. In this case, there is no guarantee that they will get their money back. However, a transaction using CBDC identifies the identity of any person, in addition, it can validate transactions using a biometric authentication process. Therefore, the Central Bank can easily freeze the agent’s money in case of fraud and return the money to the victims.

Someone may ask how you can make a transaction in the absence of the internet or electricity. You will be able to pre-download eTaka on your mobile phone using a dedicated app, and then transfer eTaka using this app to another person’s device without internet or electricity, as long as both devices are nearby. Of course, you will need internet in case of a remote transaction.

When we use mobile financial services such as bKash, the application collects valuable information about citizens, this data can be extracted, transformed and loaded into a data warehouse for data mining. After that, the data can be transformed into information. Such valuable information can help the government make informed decisions. For example, how much money did citizens spend on healthcare, education and transport? What do people living in a poor area buy most often? What goods are most often bought by the middle class, wealthy people? Who transferred money to scammers in the last 12 months and more. Of course, this will require government incentives and technological support for bKash. In other words, achieving larger goals will require a strategic partnership between private organisations and the government.

On the other hand, if the CBDC is implemented, billions of public records will automatically be collected in the database of the Central Bank. This will require the Central Bank to develop policies in the retention of data, backup strategy, risk management and data ownership. The Department of Revenue will be able to extract data from the Central Bank and other institutions such as customs, hospitals, banks, in order to achieve the goals mentioned above and more.

The biggest concerns when using digital currency are related to privacy, security, legal issues, risk management, and contingencies. As mentioned earlier, the use of eTaka will allow the Central Bank or mobile financial service providers to collect vast amounts of data. Therefore, the design of the database must be carefully structured so that the id number and the personal details are not merged without the permission of the authority in charge. In the event of misuse of personal records, the authority in charge must be legally liable.

CBDC can be used to violate a person’s freedom if it is not protected by law. For example, if a company decides to import certain products from a certain country using a CBDC, the authorities can use a special algorithm for the CBDC, which can prevent the business owner from paying for the products of their choice or force them to buy from a certain country. Another example, if the authorities hold a person under suspicion, his money can be blocked. Of course, if the person is a criminal who poses a danger to the country, the sanction can be applied through a fair trial. There must be a legal guarantee providing peace of mind when using a CBDC. Thus, it would be important that the Governor of the Central Bank has special powers approved by the Supreme Court of Bangladesh that would allow the Governor not to compromise under any political or external pressure to protect the privacy, security and money of an individual.

Digital currencies can be extremely vulnerable to cybre attacks if the central bank fails to develop proper technical architecture, prevent access to the system through the back door, carefully check for software updates and any features that may trigger after a certain period of time. We know that once money is hacked out of a bank, it takes many months or years to trace how it happened. As an IT expert dealing with billions of public records in the development of a data warehouse in Medicare Australia, I believe that Bangladesh could set up a CBDC project for testing. However deploying CDBC too early would be a risky investment until the US, China, Russia, India and the EU show full success in using CBDC. Moreover, the expansion of the use of traditional non-cash taka, involving public and private organisations, should be accelerated. This is a good way to manage public money and achieve stability in the country.

Dr Mizanur Rahman is IT Specialist at Enterprise Data Integration, Data Warehouse. Ex-Director, Data Warehouse, Medicare Australia. [email protected]