In 2023, one of the hottest topics among crypto regulations is central bank digital currencies or CBDCs. Many countries are approaching the issuance or are in the active testing phase of a government digital currency aimed at changing the perception of money and the role of banks in the economy.
News about CBDC projects being launched in one country or another pops up almost every week. However, details on how they will work and how they will affect the economy are often left out.
The cryptocurrency community is very cautious about digital currencies, with some even calling them "pure evil." At the same time, certain experts believe that CBDCs are the basis of the future monetary system.
Sergey Shashev, co-founder of Broxus and the Everscale DeFi Alliance and a key contributor to the Everscale network, shared his ideas about what CBDCs are actually for, how their issuance will affect the cryptocurrency market, and what changes they will bring for businesses and ordinary people.
The state of business and the main advantages of CBDCs
According to current analytics, two-thirds of all countries have digital currency on the agenda. The development and gradual adoption of blockchain demonstrates the technology’s huge potential and advantages in the financial world.
As regards the fundamental advantages of CBDCs over the existing monetary system, the introduction of digital currency allows for the automation of many economic processes at the government level. For example, the payment of taxes and contributions to pension funds. Currently, this is handled by a massive bureaucratic apparatus, and there is inevitable corruption on the way to distributing financial flows.
Solving just this one problem will make a significant contribution to GDP growth. A related study was conducted in China, which found that in 10 years, the issuance of a digital yuan would raise the pace of economic growth by 50%. In other words, while the normal GDP growth rate is 4-5% per year, with the introduction of a CBDC, it would be 7-8%. And this is a complex percentage; that is, over time the impact of the digital currency on economic growth would only increase.
Sergey Shashev commented:
“This year, according to my estimates, at least one or two countries will begin trading with each other using digital currencies. And for the rest, there will inevitably be an irresistible desire to join this process.”
Types of CBDC in development
Today, there are two main types of CBDC in development: retail, which is a full-fledged analogue of existing money, and wholesale digital currency, which is only for conducting business between organizations and making international trade transactions.
A reasonable question arises: which of these two types is more popular or in demand? It very much depends on the level of infrastructure in the country. There are countries in Southeast Asia where smartphones and mobile financial applications are widely used, and many residents do not have access to bank accounts. For such users, CBDC integration will be as seamless as possible. Meanwhile, in countries where mobile payments and everything associated with them are not widespread, CBDCs will be adopted much slower and will most likely start with foreign trade operations.
Generally, legislation is a very important point. Because in many developed countries, such changes happen slowly, as there is a complex social contract that takes into account the interests of various participants, and therefore lawmaking involves a very long process.
CBDCs, privacy, and anonymity – is it a real thing?
One of the main criticisms of CBDCs is the threat to privacy. CBDCs are certainly not about privacy, and they should not be, as they solve different issues that the current monetary system is struggling with. But if you think that Bitcoin and stablecoins are about privacy, they're absolutely not. Somewhere around 90% of addresses and transfers, if not more, have already been traced a long time ago, and even DeFi-related crimes or any other cybercrimes are already being investigated pretty quickly.
In this aspect, there will be a golden mean, a yin and yang. Everything will be mixed together: there will be CBDCs and cryptocurrencies, and their worlds will be connected somehow. From the crypto adoption point of view, this is a good thing, because the overall size of crypto users will grow with the launch of new CBDCs and the associated economic transition. The thing to bear in mind is that the world will be different, and different types of currencies will coexist.
Use cases of digital currency
Cross-border payments are one of the most obvious areas for the use of CBDCs. Even in 2023, in the high-tech world we live in, there is still a huge number of unbanked people without access to mobile banking or a bank account. Cross-border payments with unofficial counterparty agents from local communities make up almost 30-40% of all cross-border remittances.
Another example is transferring money through money systems like Western Union. The "round-trip" commission, depending on cross-rates, is between 6% and 12%. The consumer inevitably ends up with double conversion. As a result, the cost of the transfer is too expensive.
This is the process we are building: the sender comes with digital currency, either to a transfer point or to an ATM, and needs to convert and send one currency to another. Both currencies are digitally deposited as stablecoins in the AMM pool, and the exchange takes place directly between these currencies, with no conversion to the US dollar. There is liquidity on both sides of the pool. On the other end, the currency is received through a transfer operator, which charges only 0.1% for the exchange of digital currency. Thus, the total fees do not exceed 3% of the transfer amount.
This is one way you can use digital currency, and it is convenient, fast, and cheap for people who do not have bank accounts or cards. And that's several hundred millions of people in Southeast Asia alone.
Let’s go beyond cross-border payments. With CBDCs, it is possible to set up programmable actions as smart contracts, and this is truly one of the exciting features. For example, automatic fundraising, depositing money for a child's education, or retirement savings. Some of these things can already be done using banks, but the overall level of programming can be much more complex and advanced with CBDCs and smart contracts due to their blockchain nature.
How CBDCs will change business and international trade
It is important to understand that currently, every foreign trade transaction goes through the US dollar. Take, for example, two countries like the United Arab Emirates and Pakistan, which have a big trade turnover, all of which is denominated in the US dollar. There is a constant pressure on the national currencies because, for example, rupees constantly need to be sold in order to buy dollars. However, the UAE dirham is quite trusted in Pakistan. So, direct payments in dirhams and rupees are possible, and this can be organized with digital currencies.
In the current banking realities, many employees are involved in the KYC and AML areas, and these activities require constant expenses. It also slows down transfers. In addition to this, new transaction rules are constantly appearing, and all banks have to follow them for obvious reasons. As a result, even neighboring countries have trade problems.
There is a demand for unlocking the possibilities of cross-border transfers. It could be done with baskets of currencies, AMM pools, and mutual correspondent banks – there are different architectures. One way or another, this will make economic processes easier and cheaper for almost all countries because cross-rates and long chains of intermediaries will eventually disappear.
Finally, the paperwork for trade operations will be reduced, which will also eventually reduce expenses for trading. All banking and business processes can be built in the crypto world – with smart contracts and sending, blocking, or even burning tokens to avoid fraud in the long supply chains, using multi-signature wallets will increase the level of trust. And such changes in the traditional finance sector will happen in three or four years. Even though it’s still quite a long journey, it’s an inevitable transformation of the financial world that will open new possibilities for everyone and establish more efficient markets.
Features and benefits of Everscale as a blockchain platform for hosting CBDCs
Let's move on to Everscale. Digital currencies are being actively developed, and they are one of the most prioritized areas for the Everscale ecosystem. According to our estimates, a payment service such as VISA handles about 30,000 or 40,000 thousand transactions per second in an average country, and Everscale is definitely capable of performing such computations on-chain due to its unique architecture and ability to scale the blockchain infinitely. Several live tests were conducted in September 2021, where the Everscale network achieved 55,000 transactions per second with 200 validators on the live net. It is worth noting, however, that this is not the ultimate limit, as by adding more validators (another 200), the network could easily scale to 100,000 transactions per second.
Everscale’s team and network contributors saw its potential to be used for processing digital currencies, and luckily for us started to work in this direction a while ago. The CBDC project being built on the Everscale blockchain is responsible for a significant increase in the research and development budget, as well as recognition of the technology and its adoption by the crypto community and people in general.
It turns out that any stablecoin can evolve into a CBDC with further integrations with different wallets. One such wallet could be EVER Wallet, and as a result, the ecosystem’s dApps as well as digital currencies will gain more users and liquidity. Moreover, this is an ideal environment for developers to build any decentralized application in. At the end of the day, how can you get 100 million users, for example? No other blockchain platform except for Bitcoin and Ethereum has reached such figures yet. We aim to reach these numbers through stablecoins and CBDCs. Ultimately, all decentralized applications on Everscale will benefit from these integrations.