Following in the footsteps of crypto, banks around the world are examining the potential of adopting digital currencies to enjoy many of the benefits that cryptocurrencies offer. Central Bank Digital Currency (DBDC), whilst not decentralized, can still experience some of the key drawing points of crypto including greater efficiency, transparency to combat illicit activity, speeding up outdated methods and greater security. Alternatively, it could be viewed that such currencies are being created to maintain control over the financial system as a direct response to the freedom traditional crypto currencies promise.
Whilst this idea is not new, and indeed countries such as the Bahamas, Nigeria, China and India are already using digital currencies, in the past couple of months there seems to have been a renewed interest in them, with a couple of projects in particular having notably different situations.
The UK’s characteristic digital and crypto-friendly approach can be found in a consultation paper released last month on the potential of a digital pound. Notably in the paper, a joint project between the Bank of England and HM Treasury, the benefit of a blockchain-based (or other distributed ledger-based) system and the advantages of leveraging smart contracts are discussed in a positive light, suggesting that a token not too dissimilar to some existing stablecoins may be in the works. In an approach typical of the UK’s stance on crypto, the paper was released as a consultation, strengthening the inclusion the UK government has shown to these new technologies disrupting the financial industry.
One jurisdiction that has shown a markedly different approach to crypto than the UK is Iran, where the government severely restricts crypto activity, requiring permits for mining and making the trading of crypto illegal (though mined crypto can be used to pay for imports). Nevertheless, Iran recently announced the end of the pre-trial phase of its digital rial - a cryptocurrency that it describes as being created on infrastructure to recreate the role of blockchain technology - that would be the digital currency of the Central Bank of Iran. The project will be moving into a full trial phase to expand the country’s payment systems, likely with the goal of finding a way round some of the sanctions it faces.
In a similar vein, the launch of the pilot for Russia’s CBDC is set for the start of April. In this, 13 banks will test the new digital ruble for transactions between individuals and payments in trade and service enterprises. Although participation will be limited and restricted in scope, it will involve real users. This acceleration of Russia’s adoption of digital currency may be linked to the sanctions it has been hit with since its invasion of Ukraine, though methods to enforce sanctions in the crypto sphere have already been put into place.
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By Matthew Warner