What is it about island islands and developing countries and their experiments with Central Bank Digital Currency (CBDC)? What makes them plunge into risky waters with dire consequences if the launch is wrong? There appear to be several reasons for this phenomenon. One is the lack of quality existing legacy infrastructure, the other is the cost: digital transformation is very asymmetrical, a big benefit for a relatively small investment. Added to this, is the fact that the desire to change is driven from above, usually few people have to be persuaded in order for radical ideas to be implemented. Of course, in a small country the project scale, including the participants who will join, can be managed. Obviously this scale helps national projects launch with relative ease. On the contrary, such a project would require quite a bit of work for the world’s major currencies. Except for the Peoples Bank of China which has strategic ambitions, no major monetary authorities are considering producing CBDC in the coming quarters.
The sand dollar project from the Bahamas is one of the first in the world. Bakong, CBDC from Cambodia is already in production. The SOV project created an algorithmic currency which is the legal tender in the Marshall Islands. The Bahamas and Marshall Islands depend on the US Dollar. Relying on exogenous money is a sure way to ruin, because the money supply cannot be controlled by the sovereign state. The examples cited above fall within a broad spectrum of CBDCs. Most of them involve a two-tier system with the monetary authority that issues the CBDC and the commercial and retail banks that distribute it. Tracking is carried out through some sort of shared infrastructure to create freely exchangeable currencies.
The Central Bank of the Eastern Caribbean (ECCB), founded in 1983, is the Monetary Authority for the eight-island economic group – Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St Kitts and Nevis, Saint Lucia, and St Vincent and the Grenadines. Names that evoke sun, sand, beach and happy people. However, the reality on the ground is very different. Tourists come during the high season and barely touch the surface of the realities of life on the islands. Hurricanes, often destroy infrastructure, quite a number of people living on very little.
In a scattered cluster of island economies spread over many square miles of ocean, the distribution and management of cash is a huge challenge. People without a bank account and without a credit or debit card must rely on cash for payments. The main goal of the CBDC ECCB is to be a retail payment system, for people who do not have a credit card, for e-commerce payments and low-cost merchants, sending money to people at low fees. Just downloading the application on the phone is sufficient to allow both custodial and non-custodial wallets. Custodian wallets are prepared by commercial banks for ordinary account holders who have completed KYC / AML and other “normal” practices. Non-custodian wallets are for people without a regular bank account, provided by major government agencies with minimal demand. Parallel payment instruments use a smart card that uses NFC (Near Field Communications) to interact with the merchant terminal, the smartphone does not need to use DXCD. NFC is familiar to many from its use in the tap and pay system.
Bitt is the premier solutions provider working with the ECCB on DXCD. Bitt was financed by Medici Ventures, separated from Overstock and T-Zero created by former Overstock CEO, charismatic polymath innovator Patrick Byrne. Many of Bitt’s top executives are from Medici Ventures or former Overstock employees.
Stephen Phillips, VP product of Bitt, presents the system architecture at Hyperledger Capital Markets Special Interest Group on January 27th. The architecture is divided into two parts, namely the Commerce layer and the Numa layer, the Numa layer contains a ledger and there is no direct connectivity for participants to that layer. All interactions with the Numa layer or ledger layer occur via the API or application program interfaces which are mediated via security, regulatory reporting, and policy settings. The trading layer has a private layer for the central bank and financial institutions. Familiar techniques like Multi-Factor Authentication protect access. Identity management and user data storage are left to the bank. The Financial Institution system is decentralized and reuses existing infrastructure that is integrated with the trading layer.
The public API layer allows e-commerce, merchants, wallets and third-party applications to connect. Phillips explained that the architecture developed for the ECCB CBDC was reusable and was actually used to develop CBDC for Belize. The API layer loosely pairs the specific ledger used, in this pilot phase Hyperledger Fabric 1.2. This allows for a relatively agnostic solution; as long as API calls in Numa can be translated into the underlying ledger, the ledger framework can be replaced. This is very typical of loosely coupled architectures that allow for some flexibility.
Such loose coupling is also a gateway to multi-currency and multi-asset networks, and the creation of a true digital market. The next step is also towards true carrier instruments like cash, this is technically more difficult to achieve than previously thought, token-based systems with bearer proof rather than identity may require more sophisticated cryptography such as Zero Knowledge Proofs and Homomorphic encryption. This is the future direction CBDC can take.
In monetary policy, themes such as demurrage or negative interest rates a la Silvio Gessell to prevent hoarding of money and get people to spend to power the economy in times of stress are also possible with CBDC.
Along with the technical complexity of the system, to launch such a pilot and production environment would require a great deal of field play and Phillips seemed the right person to lead it. Engagement with, education and listening to local traders and select users should be taken into account in pilot launches. The success of such a trial requires extensive local knowledge and patience as the concerns of many participants must be addressed. The next stage is the production launch which will take place at the end of March. It’s likely to start small and gather momentum as adoption increases.