How CBDC Will Replace Cash: Experiment To Programmable Money by@serkhitrov

How CBDC Will Replace Cash: Experiment To Programmable Money

Sergei Khitrov HackerNoon profile picture

Sergei Khitrov

Entrepreneur, Listing.Help Agency Founder and CEO

The current outbreak of coronavirus disease has significantly accelerated the development of central banks digital currencies (CBDC). It is easy to check with the growing number of projects and the recent first official launch of digital currency in the Bahamas. Moreover, Deutsche Bank analysts say that in the long term, CBDC can replace cash.

What is CBDC?

Central Bank Digital Currency is a digital form of fiat money that can be launched by central banks. Right now, the People's Bank of China has a project of a digital renminbi. The Netherlands' financial regulator declares its readiness to play a leading role in the development of digital currency within the Eurozone. The US Federal Reserve, Bank of England, Bank of Japan, and the European Central Bank are exploring the possibilities of applying and developing this technology.

Why now?

The global pandemic has given an additional impetus to this trend. The Bank for International Settlements (BIS) announced that the coronavirus pandemic would accelerate the spread of online payments and update issues related to national digital currencies. His recent report states that COVID-19 changes the public's attitude toward cash, even though the scientific community's prevailing opinion is that transmission of the virus through banknotes is unlikely. Members of the US Congress have also recently called for a "digital dollar."


Central banks respond to challenges from private sector initiatives, f.e. the Libra Association by Facebook. Also, CBDCs offer significant general-purpose benefits that make them very attractive for research and development. The digital nature of such currencies modernizes payments, making them more efficient and can lead to a more transparent retail payment system, reducing the volume of black-market trading.

Moreover, in their recent report, Deutsche Bank called on the European Union authorities to accelerate the launch of the CBDC against the backdrop of China's progress in this area. At the same time, lagging in the race to create digital currencies is a matter of sovereignty, as they will have to adopt CBDC technologies and standards of payments of leading countries.

Perspectives on these two poles — privacy versus convenience — vary from culture to culture

The ECB sees the digital euro as the electronic form of the central bank's digital currency for "making payments quickly, easily, and safely." It is important to note that in their vision, the CBDC will not replace but supplement cash, the production of which will continue.

The Russian central bank also supported this position, so the digital currency is considered to be the third form of the Russian ruble, along with cash and non-cash funds: "All three forms will be absolutely equivalent... In this case, money owners will be able to transfer rubles from one form to another freely..." the central banks report says.

The programmable money

The key difference in CBDC is programmability. It means that when central banks create new CBDC tokens, they will already have the rules of spending. A well-known example is the US food stamps: recipients get coupons, the equivalent of the money that can only be spent on food, not on alcohol, cigarettes, or gambling. These "food stamps" will be digitized tokens, transactions made on a blockchain platform using smart contracts in their current form. 


At the same time, there are more suggestions about the "programmability of holders" of such CBDC: for example, separate tokens for refugees, disabled or low-income persons. Only these groups will be able to spend tokens, and ownership will be determined through the digital wallet on their smartphones.

Thus, in case of the launch of a programmable CBDC, spending money on goals other than the prescribed ones will not be physically possible. As a result, programmable money for governments can become "transparent" and allow countries to stop criminal activity, tax evasion, and drug trafficking.

The first official launch of CBDC

The transition to digital currencies has already begun, and I think that for the past six months, CBDC development has only accelerated. So, on October 20, the official launch of the digital currency of the Central Bank of Bahamas Sand Dollar took place. The country was the first in the world to release digital currency at the state level. The price of the Sand Dollar is pegged to the Bahamas dollar, which is pegged to the US dollar.

People can use coins with their smartphones with a special digital wallet approved by the central bank (available for download in the App Store and Google Play).

Sand Dollar-integrated wallets are enabled with multi-factor authentication features. All mobile devices are required to support a device passcode or biometrics to access the app and complete transactions. 

Commercial banks of Bahamas, payment service providers, and money transfer systems work with Sand Dollar. As stated on the CBDC project website, digital coins are already accepted in any shopping center, and the commission for transactions is very low.

The project does not provide CBDC users' anonymity but strictly follows the rules of privacy and data protection. In the future, the CBDC plans to release new tokens as demand grows and withdraw fiat dollars from the market to maintain market balance. There are also plans to use Bahama's CBDC outside the country. However, the project is likely to face one of the current problems of blockchain - compatibility problems (both with other world currencies and other CBDC).

The pandemic has the potential to accelerate trends that were already emerging before the crisis; trends that will lead to structural changes in the global economy. According to the Bank for International Settlements' latest report, now 80% of central banks are researching the possibilities of national digital currencies, half of them are already experimenting with new payment means. For the last six months, the number of CBDC projects has increased; the first project was officially launched in the Bahamas. Thus, Marion Labour, an analyst at Deutsche Bank, believes that a group of central banks in the Eurozone, UK, Japan, and Canada will issue CBDC within the next three years. 

Looking forward, we can imagine an entirely new architecture for money — a step as important as the invention of a credit card. Moreover, this type of money will have a new key feature - programmability. Such changes can happen even faster than we expect. So, I believe that this trend will only increase and next year the number of launched projects may rise to 5.


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