How This Digital Currency Will Transform The World and Benefit Cashless Societies Despite common misconceptions, CBDCs offer unique value as vehicles for financial reform capable of improving the lives of those who need it most.

Over the past couple of years, I have been working with my team at Broxus to develop the infrastructure necessary for central banks to deploy digital versions of their currencies. While we have been doing this work, and other projects have been engaged in similar endeavors, the dialogue around CBDCs has taken on something of a life of its own, colored by misconceptions about what Central Bank Digital Currencies (CBDCs) are and their purpose.

At their essence, CBDCs are digital versions of a country's fiat currency that are pegged at a 1-1 ratio with the original currency. For example, if the US were to release a CBDC, that would be in the form of a digital dollar that is always equal to its fiat counterpart. While CBDCs are related to cryptocurrencies and blockchain technology, some key distinctions exist.

CBDCs are, by definition, recognized digital legal tender. That means that, unlike other similar digital assets like stablecoins, CBDCs carry the equivalent legal weight as fiat currencies. This is important as one of the main drivers of CBDC expansion is the shift occurring globally to cashless societies. As more societies become increasingly cashless, the current economic infrastructure has struggled to support local and international economies. CBDCs are a potential way of solving these issues.

Much of the disconnect has arisen from many's perceptions concerning cryptocurrencies, and the association CBDCs have in the public's eye with cryptocurrencies. The truth is, while cryptocurrencies remain primarily speculative, CBDCs are something else entirely. Here, speculation plays no role. CBDCs, if instituted correctly, would be able to optimize financial systems that have grown outdated and been failing to meet the needs of the world's most vulnerable demographics from a financial perspective.

While the value of cryptocurrency is often tied to future developments and use cases, with CBDCs, the value is in the here and now. The utility of these digital currencies is something real, something that addresses shortcomings that are palpable around the world right now. I believe that the framework in which we discuss CBDCs needs to change so that ongoing efforts to integrate this technology into the fabric of the world economy may come to fruition.

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CBDCs and universal basic income

Social security systems of the 19th and 20th centuries have all required the construction of a significant state body to redistribute wealth. These bloated governance structures have generally not been able to adequately assist the people who find themselves in the more vulnerable spheres of society. To address this issue, an experiment was conducted in Finland that sought to provide a Universal Basic Income (UBI) to generally unemployed people. Rather than using a welfare model, benefits were given out in Finland through a €560 direct cash deposit each month. On the one hand, this provided direct support to those in need and, on the other hand, reduced the costs of collecting, accounting and spending funds that run high in welfare programs.

The final results of the Finnish experiment are now in, and the findings are intriguing: the UBI in Finland led to a modest increase in employment, greatly improved results in the material well-being of recipients, and increased positive individual and societal feedback.

CBDCs can be uniquely positioned to improve the performance of Universal Basic Income (UBI) programs. Since most of the launched pilot projects and prototypes for CBDCs are focused on a 0% deposit rate, i.e., a situation where CBDCs are subject to inflation and depreciation, central banks could gain more effective leverage in managing aggregate demand in the economy by collecting taxes and distributing part of them to UBI recipients. By issuing currency in digital form, central banks will be able to radically reduce the costs of the state to ensure the circulation of the national currency and social support for the population.

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Reaching the unbanked

In 2021, according to the World Bank Group, 1.4 billion adults were still unbanked. That is a massive portion of the world's population, and the failure to provide these people with adequate banking services is likely to prolong poverty cycles and have a stunting effect on global economic growth.

This problem is acute in South East Asia, and a good example of it can be seen in The Philippines, an area that we have focused on in our work. Just over half of the adult population in The Philippines has access to banking services. In a healthy economy, small and medium-sized businesses need access to banking services to thrive. With just over half of the population having access to those services, the Filipino economy cannot flourish, leaving the less affluent to bear most of the brunt.

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Lowering the cost of money transfers

The lack of banking services has led Filipinos to utilize alternative financial methods and seek work in other countries. Nowadays, remittances from Filipinos working overseas and sending money home account for 10% of the Philippine GDP or roughly 70-80 billion dollars. At the same time, the cost of money transfers is approximately 8-10% of the total amount of the transaction.

Even here, CBDC technology can be effective in improving the situation. As part of our work in CBDC development, we have established a partnership between the Everscale network and DA5, one of the leading authorized direct agents of Western Union in the Philippines. The blockchain remittance service created by Everscale and DA5 will be the first technology in the Philippines capable of speeding up and lowering the cost of this process. As a result, people will no longer have to pay such high fees on their transactions once the service is launched.

The first phase of the partnership will see the launch of Everscale's new stablecoin, which will be tied to the Philippine peso. After the stablecoin is released, users in the Philippines can immediately exchange fiat for its digital counterpart at industry-low rates. But this is just a stablecoin; if The Philippines were to launch a CBDC, there would be benefits for all sectors of the economy.

The privacy debate

A common argument against CBDCs is their lack of privacy. However, this is only partially true: it can be shown that more centralized systems can allow more privacy than decentralized protocols. The bad privacy properties of Ethereum, in which states are made up of reused addresses, are widely known. In addition, users sometimes use uniquely linked domain names, making their transactions transparent to outside observers.

There is a trade-off when designing decentralized protocols: complete on-chain privacy can lead to an inflation problem within the protocol that cannot be tracked - because the recipient and quantities are not known. A sidechain like Liquid gets around this problem quite simply: no more bitcoins can be created inside the protocol than were received at the input. In a centralized system, one trusted oracle can be provided that determines the boundaries of the issue.

Centralized solutions based on Chaumian e-cash could use more advanced cryptographic methods to hide counterparties and quantities and selectively disclose this information at the request of the parties involved in transactions. In addition, there is no limitation on how privacy-enhancing features can be implemented since they are not bound to decentralized protocols with limited network resources and free space on the blockchain.

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CBDCs as a vehicle for real and necessary economic change

The issues above are not going away, and as countries worldwide continue to develop, the people affected by them are likely to continue to suffer. Quite simply, governments have never had the tools necessary to implement adequate benefits programs for those who need them. Now, however, that opportunity is here.

That is the real utility that all of the efforts towards developing CBDCs are based upon, and that should be at the center of the discussion around this new technology.