💥 US closer to a digital dollar!💥 CBDCs by region with special coverage of Jamaica's JAM-DEX, Digital trust matters
China winning the tech competition with the US!
1. 💥 The US takes a big step toward a digital dollar!💥
2. CBDC overview covering CBDC development by region!
3. Jamaica’s JAM-DEX CBDC
4. Your unhealthy relation with digital trust
5. China winning the tech competition with the US!
Wheatfield under thunderclouds, Vincent Van Gogh, July 1890. Van Gogh Museum
1. 💥 The US takes a big step toward a digital dollar!💥
The US takes a big step toward a digital dollar with White House and Treasury support!
Download: here
With the White House’s announcement of a comprehensive framework for digital assets came two breakthrough reports laying out policy and technical objectives for a US CBDC.
In tandem Treasury secretary Yellen recommended that the US:
“advance policy and technical work on a potential CBDC, so that the United States is prepared if CBDC is determined to be in the national interest.”
There are five documents that were dropped by the White House and Treasury! We’ll take a look only at the CBDC Policy document:
Analysis of key sections 6, 7, and 8:
6.a The CBDC system should promote compliance with AML/CFT requirements and mitigate illicit finance risks.
It should come as now surprise that AML/CFT are a critical part of the digital dollar!
6.b The CBDC system should support U.S. leadership in the global financial system, including the global role of the dollar.
This is the primary motivation for a digital dollar beyond all others! No one wants to lose dollar primacy.
7.a The CBDC system should respect democratic values and human rights
"The CBDC system should be able to incorporate technical protections that prevent the use of CBDC in ways that violate civil or human rights. The CBDC system should also be protected from abuse during periods of high political volatility or deviation from democratic values."
Now that section is a shocker! The US policy is clear there will be a digital kill switch designed into the system in case the CBDC is used in ways that ”violate civil or human rights” and “deviate from democratic values.”
This means that all foreign-held CBDCs will be subject to a new age of digital sanctions. If I were a nation in the grey zone I’d use stablecoins!
8.a Align with democratic and environmental values, including privacy protections
"Sensitive financial data should be private. The CBDC system should maintain privacy and protect against arbitrary or unlawful surveillance... ...only data that is strictly necessary for advancing CBDC system policy objectives is collected."
This is far less than I wanted. It gives me little comfort as we have no understanding of how much data is required for “advancing CBDC system policy objectives.” While we know that the system will be KYC/CFT compliant, how much data is required to achieve policy objectives?
Here’s what the document should have said: “The CBDC system should maintain privacy and protect against arbitrary or unlawful surveillance. Portions of the system operated by the government will not contain identifiable personal data or a means of uncovering this data. Payment providers responsible for KYC will be the only parties capable of unveiling a user’s identity. This is what we have today with credit cards.
The idea is that the gov’t can run the system but the key to unlocking identity resides outside of the government’s hands.
A problem of logic
In 6.b we see that the US wants to retain dollar primacy, which in my view is the main reason for the US’s newfound interest in CBDC. What is clear is that in an era of sanctions dollar use is in decline because of the fear that the US will further weaponize the dollar. The IMF has shown conclusively a migration away from dollar holdings, in what I call a risk management exercise to reduce dollar exposure.
Now in 7.a the policy is clear that the digital dollar will be held to a standard that is likely higher than the existing policies. I say higher because with digital technology very specific sanctions can be put in place by the US without SWIFT or the potential that other SWIFT using nations will disagree with the sanctions.
So how will the digital dollar help the US maintain dollar primacy if it will likely be more susceptible to sanctions than the current dollar? Do you see the problem?
Takeaways:
Overall this is a political document, it both gives and takes away. I do give the administration credit for taking CBDC very seriously!
Questionable foreign nations should use stablecoins or digital yuan.
It should have been much stronger on privacy. The digital dollar has high democratic ideals, and privacy without caveats is critical.
We are still 7-10 yrs away from a digital dollar but finally making progress!
2. CBDC overview covering CBDC development by region!
Great CBDC overview covering CBDC development by region! A great update that is not technical, that will bring you up to date with the latest CBDC developments.
Download: here
Deloitte did a nice job on this regional CBDC overview but left out a few things that I will endeavor to add to ensure that you’re up to date.
🔹 US:
The US is in “radio silence” on CBDC research, even if it published policy papers just this week. That the Fed lacks vision and is forever non-commital is a given, but the silence on the research side concerns me deeply. Without research updates, we’re all flying blind. Why it matters in 4 words: “Show us the privacy.”
The big news recently was that the US Treasury will support CBDC issuance. This isn’t a green light but is a small step forward. The reason? To protect dollar primacy, a key point made in the President’s EO. Also in the news is the announced launch of the FedNow RTGS system next year…..see India for more…..
🔹 India:
India’s CBDC is starting a pilot this year with 4 state banks and a number of fintechs! Great news! India is also the best example as to why a real-time RTGS system like their successful UPI, or FedNow, is not a CBDC replacement. Even with the stunning success of UPI, India is -still- building a CBDC because it will bring even more financial inclusion. FedNow is not a CBDC replacement.
🔹 Russia:
Unsurprisingly Deloitte avoided all mention of Russia. Its status as an international pariah likely made Deloitte's corporate coms department cringe. Like them or not, Russia has fast-tracked digital ruble development with plans to connect banks in 2024. The central bank stating: “Cross-border integration with the digital yuan and the central bank digital currencies (CBDCs) of other “friendly” countries” will remove the need for Swift.
🔹 Africa:
At last count, there were 10 significant CBDC projects underway in Africa. The CBDC that is the furthest along and most interesting belongs to Ghana. The eCedi is being built with off-line capabilities and is in testing now. This is big!
Nigeria’s eNaira, Africa's first, just entered a new phase where it can be used with SMS and on payment app Flutterwave. Phase 1 rollout was limited to bank account holders and we can now expect greater growth.
🔹 Asia:
What is clear is that driven by China, the region is likely to be the first major user of CBDCs in cross-border trade. The first CBDC transfer hubs are now being developed in Singapore and Hong Kong to support this. Whether the US likes it or not the global standards for CBDCs are being set in Asia.
🔹 China:
I will not forgive Deloitte for claiming that China’s digital yuan is built on blockchain. It is not and I recommend that they read my book Cashless!
Adding my commentary to the Deloitte report will give you a good around-the-world update on CBDC projects.
Takeaway:
As I’m fond of saying: CBDCs are coming, whether you like it or not.
3. Jamaica’s JAM-DEX CBDC
Jamaica’s JAM-DEX CBDC comes with an instruction manual, that does a great job of explaining to users how this new CBDC works.
Download: here
Jamaica’s JAM-DEX CBDC launched July 11, comes with the slogan “No Cash, No Problem” and a logo that is a depiction of the national fruit the ackee. So far there are no reports from the Jamaican central bank of usage rates but most importantly there have been no known system problems.
Jamaica’s CBDC is two-tier, but its design is anything but standard. JAM-DEX uses cryptographically secure tech from the company aptly named “eCurrency” to create “digital bearer instruments” a form of emoney. It is not technically speaking, a token. This emoney is then carried on Bank of Jamaica’s existing RTGS system built by Montran.
What makes the system unique is that the Bank of Jamaica was able to repurpose its existing RTGS system which undoubtedly made its CBDC easier and cheaper to launch. Kudos to eCurrency and Montran!
Users can use JAM-DEX on the Lynk wallet system which is the leading local “superapp” and on apps provided by their local bank and eventually telecoms.
JAM-DEX’s features
• No bank account required, no fees for payment and true P2P transfer!
• “CBDC will reduce costs for merchants and banks as the costs of handling and securing cash.”
• Financial inclusion-friendly digital wallets only require a name, address, taxpayer ID, and picture ID.
• No identity data transferred with payment for full anonymous payment.
• Wallet provider is the only entity with personal information, and can be compelled by court order to provide it to authorities. (This is likely to be the standard, just like credit cards.)
• Money can be added from a “Smart ATM” which fosters inclusion. It is likely an NFC-based transfer like in China’s ATMS. No pictures yet of these machines.
• Bank of Jamaica will cover 100% of CBDC funds if a digital wallet provider is unable to pay. Not deposit insurance per se but close enough.
• No overseas use.
What is interesting is that the Bank of Jamaica is not imposing any transaction limits on JAM-DEX use.
Instead, it is relying on banks to use their own risk management assessment to determine limits for people and companies. For now, the Lynk wallet has limits of JMD 100,000 roughly US$650 for P2P and bank transfers.
Takeaways
Don’t expect JAM-DEX to be adopted quickly, the BoJ is clear that they expect growth to be slow.
I think JAM-DEX is going to do fine and I look forward to reading the ECB’s digital euro “instruction manual” someday!
4. Your unhealthy relation with digital trust
You likely have an unhealthy asymmetric relationship with digital trust! You trust that companies will protect your data far more than they actually do!
Download: here
McKinsey delivers this stunning statistic as it declares that most companies aren’t in a position to live up to consumer’s digital trust expectations:
“70% of consumer respondents believe that the companies they do business with protect their data, while 57% of executives report that their organizations suffered at least one material data breach in the past three years.”
If ever there was “trust asymmetry” this would be it. In an era of data brokers and daily data theft consumers still believe that companies do their best to protect their data when most do the bare minimum.
🔹 Just to hammer home how bad this asymmetry in digital trust is read this carefully:
“Less than a quarter of executives report that their organizations are actively mitigating a variety of digital risks across most of their organizations, such as those posed by AI models, data retention and quality, and lack of talent diversity. Cybersecurity risk was mitigated most often, though only by 41 percent of respondents’ organizations (Exhibit 2). “
So if you were one of the suspicious types who believed that most companies treat your data with the minimum protection money can buy you’d be right! Minimum viable protection is the norm, not the exception.
🔹 Now for those suspicious of AI read this and your worst fears will be realized:
“A similar 55% of executives experienced an incident in which active AI (for example, in use in an application) produced outputs that were biased, incorrect, or did not reflect the organization’s values. Only a little over half of these AI errors were publicized.”
Note that half of the incidents were covered up! By the way, when you read this figure, does China’s new law on auditable algorithms and explainable AI sound like common sense?
🔹 Now for the good news. There are of course companies that do excel in digital trust.
For these digital trust leaders their reward is that they outperform their peers both in loss and growth:
-"Forty percent of digital-trust leaders experienced an adverse event in the past three years versus 53 percent of all other institutions.
-"Digital-trust leaders are 1.6 times more likely than the global average to see revenue and EBIT growth rates of at least 10 percent."
So there is a clear benefit to being a digital trust leader that many companies, that provide the minimum viable protection will never see.
Takeways
Sadly, Mckinsey shows that most companies don't live up to the trust we give them.
Most companies provide the minimum viable digital protection they can, few try to excel.
We all need to stop believing the adverts that say “you can trust us with your data” the reality is you can’t.
5. China winning the tech competition with the US!
China is winning the tech competition with the US as “the contest for the future is unfolding.” THE MOST IMPORTANT READ OF THE YEAR!
Download: here
Eric Schmidt and the US think tank the Special Competitive Studies Project (SCSP) make it clear that the next 5 years will make it or break it for the US in its tech competition with China. And for now, China is winning!
He’s right! Anyone reading my commentary on Linkedin over the years knows that I’ve been consistent in my claims that China is both innovative and taking a commanding lead in technology. I’m glad the SCSP is paying attention!
The SCSP is not only paying attention but goes into detail on why AI regulations and a national data policy are key. It is a GREAT READ with passages that accurately depict the US's tech malaise.
I credit my going to engineering school to the space race when the US push for science and technology was at its peak. Schmidt and the SCSP propose a similar national focus on technology to recapture the US’s lead which includes a controversial tech-focused industrial policy. I think these are all laudable goals.
Going too far
The SCSP document, however, is not just a rallying cry for the US to increase its competitiveness with China. If it were I would throw my support behind the document.
The SCSP, goes too far with two critical policies that give me great pause. First, the document calls for an America-first style policy that leaves no room for other nations.
The document makes it clear that the US should be the number one in the world in tech, military and economic power to the exclusion of all others, not just China. I doubt that the rest of the world will support this. What’s in it for them?
Second, the SCSP calls for US policy to actively sabotage China’s technological advances. Calling for even more actions on CHIP exports and further blocking Chinese students from US universities as security risks.
The SCSP's beggar thy neighbor policy toward China will seriously ratchet up tensions and does not envision any meaningful collaboration. Everyone will lose.
Support for a digital dollar
On fintech, the SCSP supports a digital dollar and crypto regulation while calling for the US to set global standards for CBDCs. While I applaud that the SCSP sees the e-CNY as a threat to the dollar, as I claim in "Cashless", the CBDC standards ship has sailed.
The section "what losing looks like" reads like an alien invasion where all US residents should shelter in caves. Industrial competition is rarely so binary and the section is designed to instill fear in all readers.
What I find ironic is that there is no acknowledgment that it was Schmidt’s generation of CEOs that actively offshored production to China in the first place.
Will it work? No, not just because of dithering in Washington, but because our world changed and this isn't 1950.
Takeaways:
AI and data regulation is required for US competitiveness. This section of the report is a “must-read.”
US industrial policy needs to change fast to better foster technology development.
The policy guidance portion of the paper is terrifying and if implemented would result in a harsh response from China and US allies.
Technology is the new battlefield of geopolitical competition.
Thanks for reading!
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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 an Onalytica Top 100 Fintech Influencer 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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