SPECIAL CBDC EDITION! White House and Treasury Reports on the Digital Dollar, CBDCs and Financial Inclusion and Why no Western SuperApps?
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1. The White House talks CBDC Technology
2. Treasury supports CBDC and research, take that Fed!
3. CBDCs not a “silver bullet” for financial inclusion
4. Why there are no superapps in the West
1. The White House talks CBDC Technology
🔥MUST READ 🔥 The BEST CBDC REPORT in ages shockingly comes from the White House! A FANTASTIC read.
Download: here
The White House’s “Technical Evaluation for a US CBDC System is simply the first and best of its kind. What makes it so unique is that it lays out -ALL- of the major CBDC design parameters and takes the reader through the pros and cons of each.
It presents the reader with a solid understanding of what goes into designing a CBDC behind the scenes!
I give the authors at The Office of Science and Technology Policy (OSTP), tremendous credit!
BEFORE you read this document, you need to understand that this report does not decide which design decisions to take for the US's CBDC but analyzes each on its merits. See pg (11) for their disclaimers.
Here is the OSTP in their own words on their intentions for the report:
• Does not presuppose that a CBDC system would use any particular technology (e.g., a distributed ledger technology or a centrally managed database);
• Does not assume that a CBDC system would maintain identical functionality to cash;
• Does not take any position on whether establishing a CBDC system would be in the best interest of the US;
• Does not prioritize the design choices in order of importance;
CBDC Identity Privacy
Let’s go straight to Identity Privacy on (pg 20) and the three choices available for protecting user identity data:
🔹 Collected by central bank:
“Even if policies exist to prevent this harm at this time (e.g., law enforcement needing to seek a subpoena to get identity-related information from intermediaries), enabling this capacity could allow a future Administration to use the CBDC system to surveil the population in close detail, and cybersecurity compromise may still occur.”
Great news! The OSTP understands that identity data cannot be held by the gov’t. This kills the narrative that “the gov’t” will spy on you through the CBDC!
🔹 Collected by intermediaries:
“This approach is more similar to the current AML/CFT regulatory framework, where key reporting and recordkeeping obligations are generally imposed upon intermediaries, providing consistency with that approach.”
I have said on these pages for the past year CBDC privacy will mirror or better what you have now! Banks and telcos will be responsible for identity data. Gov't can only access the data by subpoena, as it is now.
🔹 No one:
“May not be possible or sensible…. harder to identify, trace, and disrupt money laundering and the financing of terrorism and for .... AML/CFT.”
No surprise that the gov’t will not issue a “privacy coin” like Monero!
-While the OSTP gives it also takes away by introducing a new concept in CBDCs fungibility!
🔹Non-fungible units: (pg 37)
"Specific CBDC units could be marked as “tainted” if they are used in illicit activity. Regulated entities could be prohibited from engaging with this tainted CBDC, which would reduce the market value of those CBDC units."
💥The digital dollar policy document specifically discusses supporting human rights and democratic values. Now we know how they’ll enforce it and this will dissuade users.
Takeaways:
-The privacy design concepts are solid and show a better understanding than the policy document I reviewed last week’s newsletter (here.)
-"Tainted" non-fungible CBDC is a new concept, and potentially damaging to adoption.
-It’s hard to see how a CBDC that will likely be more restrictive than existing bank systems will promote dollar use and protect dollar primacy.
2. Treasury supports CBDC and research, take that Fed!
🔥MUST READ🔥 Treasury sec. Yellen supports CBDCs and research saying what the Fed would not: “Right now, some aspects of our current payment system are too slow or too expensive.”
Download: here
The US Treasury comes out in support of CBDCs research in a gently pro-CBDC paper that puts the Fed to shame!
To her credit, Yellen acknowledges the reality of payments in the US, which has some of the world’s highest credit card fees, an un/underbanked population of 24% and banks charging $15bn/yr in overdraft fees from the poor!
Compare this with Fed Governors who blithely ignore the plight of Americans and see CBDC as a “solution looking for a problem.”
Key Sections:
🔹“AML/CFT controls and CBDC” (pg 25)
All transactions including “low value, retail transactions or peer-to-peer transfers" are subject to AML/CFT. Even “smaller amounts of funds” will be subject to full AML/CFT meaning no eMoney or eCash!
🔹US international engagement on digital assets (pg 28)
The US is trying to come from behind and take a leading role in global CBDC development. “This presents opportunities for U.S. companies to lead in the development of these technical systems.” Now for the kill shot: “the US will promote international standards through bilateral and regional engagements.” Expect bifurcation of CBDC systems.
🔹Consideration 2: Supporting US global financial leadership (pg 34)
The US sees no threat to dollar primacy: “foreign CBDCs and private digital assets by themselves likely offer little new competition.” Meanwhile, sanctions and "democratic values" are high on their list to subdue “rogue actors or countries that are subject to sanctions or disagree with U.S. sanctions policy.”
🔹Recommendations from Treasury (pg. 45)
1: “Advance work on a possible U.S. CBDC, in case one is determined to be in the national interest.”
Great news! Tell that to the Fed whose CBDC research is years behind.
2: “Encourage use of instant payment systems to support a more competitive, efficient, and inclusive U.S. payment landscape.”
A given with the launch of FedNow in 2023.
3: “Establish a federal framework for payments regulation to protect users and the financial system, while supporting responsible innovations in payments.”
Great news for CBDC bad news for crypto who will not like this one bit.
Takeaways:
- Treasury was forthcoming in calling out the need for improvement in the US payments! Can it influence the Fed?
- The crusade for “democratic values” will make the digital dollar more restrictive for international payments than existing systems. Which countries qualify? What measure? How fast can a country change from good to bad?
- The US Treasury sees no threat to dollar primacy, but wants to build a CBDC in support of continued primacy. With greater restrictions/weaponization of a US CBDC how can it help?
-The US is reacting to other nations developing CBDC, not leading.
3. CBDCs not a “silver bullet” for financial inclusion
CBDCs are not a "silver bullet" for financial inclusion and need to be purpose-built to fit the needs of the country to be successful.
Download: here
Alliance for Financial Inclusion (AFI) publishes the "gold standard" report on CBDCs and inclusion!
AFI’s assessment is as good as it gets!
1️⃣ Digital and financial inclusion has been enabled by key drivers while entrenched obstacles remain.
As great as digital may be at enhancing inclusion, “remote populations, lack of connectivity, lack of identity” and cultural issues are big obstacles.
2️⃣ CBDC design can address specific access constraints that currently affect digital financial services:
“Retail CBDC can be designed to alleviate identity gaps, and mobile phone and digital access divides through its unique ability to generate digital identity proxies and enable offline capabilities while being device agnostic.”
Offline devices like CBDC cards and bracelets are critical and can help with digital ID.
3️⃣ Convenience affordability and security of CBDC can drive inclusive consumer adoption:
“Across all use cases, a key aspect of CBDC’s value proposition is its tested ability to drive interoperability and channel ubiquity...– via any device, to any provider – as a universal instrument.”
This is why Nigeria just put its eNaira on the Flutterwave platform just as China put e-CNY on Wechat and Alipay.
4️⃣ CBDC potential for financial inclusion exists but its design must be careful to avoid risks and worsening exclusion.
“CBDC will not automatically advance financial inclusion, and if not designed appropriately, could reinforce existing barriers.”
This is counterintuitive, particularly to those advocating the use of crypto for inclusion. The reality is that if only the wealthy are served by crypto or CBDC they can do more real harm than good.
5️⃣ CBDC may not be an appropriate or relevant financial inclusion tool for every developing country.
“CBDC may be a good match...in those with high digital readiness or a need disaster recovery assistance, but it may not be for others where existing inclusive instant real-time payment instruments or systems may be better suited.”
Yes, but in all of Africa there are 6 real-time payment systems!
6️⃣ Retail CBDC implementation needs to be context- specific and fit-for-purpose.
“CBDC should therefore be designed from the bottom up, considering the specific context and needs of the market, particularly vulnerable communities as much as possible.“
There are no “cut and paste” one size fits all CBDC systems. So how can the US set global CBDC standards?
Takeaways:
-CBDC “could have the potential to enhance the financial lives of millions"...
- They are not a “silver bullet” and must be purpose built.
- Off-line functionality, low-cost cards, and use on feature phones will be critical for adoption in many nations.
4. Why there are no superapps in the West
Superapps in the West? No way no how! Not until Western superapp wannabes see a shrink who helps them decide to open up!
WeChat and Alipay both became superapps by virtue of opening their platforms through the launch of mini-programs. In the West dominant providers of digital services feel no such desire to open. WeChat's big growth occurred after they opened and launched mini-programs in 2016.
Download: here
This Deloitte report on superapps is a solid read but misses the mark! Deloitte is likely too afraid to insult its clients if it puts the blame on them. I have no such restrictions and will “give it to you straight! “
Why no superapps in the West?
The reason you will have to wait for superapps in the West is that major internet services view their website as closed ecosystems. ONLY after they open themselves to other services on their sites as did WeChat and Alipay with mini-programs can they attain superapp status.
A bit of history from Alipay and WeChat pay in China. Both platforms were onboarding new users like crazy from 2014 through 16, but it was the launch of mini-programs in 2017 that allowed them to become super. In the years prior the apps were useful for payment but lacked the full features that we now associate with superapps.
It is this psychological barrier that the Western internet companies have yet to overcome and until they do they will be far from “super.” What technology they use is immaterial, but the act of sharing their internet real estate with others was the key to making China’s platforms superapps.
This was a huge psychological change even in China. The two payment platforms opened themselves to millions of businesses large and small in China. Banks put mini-apps on the platforms that welcomed them even though they were at some level rivals. Can you see this in the West? Amazon giving real estate to Citi, Chase and BofA?
This psychological transformation is still a few years off in the West although the idea is gaining momentum. How fast is embedded finance catching on? Some will say look to BNPL but in reality, this is little different from adding a new type of credit card.
Superapps are not all about payment
Others say that the because the West lacks native payment services they can never be super. I disagree, most of the large internet sites could open themselves to a multitude of services or payment systems but don’t. They willingly choose to restrict both which are vital to becoming a superapp without native payment!
For the record, none of the US/EU internet players wants to become a bank. The cost is simply too great and their capital gets far better returns in tech than in banking. This won’t change barring a radical change in banking regulations so none will become WeChat or Alipay with banking units. They cannot follow the same path as China's superapps.
This leaves them with only one option, open up to let people do more on your site. The problem is that this is such an enormous leap of faith that it is still viewed as heresy by many.
So superapps in the West? Sure, no doubt that someday someone will crack the code. This will likely be the one that makes the leap of faith to embrace openness.
First, they have to see a shrink!
Bonus read:
Payment company Plaid uses its front-row seat to look at this year's hot fintech trends in its annual "Fintech Spotlight” report.
Plaid delivers a solid and refreshingly brief read. They are the ultimate insiders and deliver solid insights. Full write-up on LinkedIn: here
Download report: here
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is number 4 on Onalytica's esteemed Top 50 Fintech Influencer list and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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