Emerging economies are wrought with fragmented payment infrastructure that operates in silos.
Not limited to only emerging economies is the cost and time it takes to clear cross-border and interbank settlements using the SWIFT infrastructure.
International settlements can take up to five business days, while transaction charges continue to erode the income of low-income groups who need to send money home.
In economies where the financial infrastructure is weak, central banks have had to incur huge costs on maintaining sanity in the financial system.
To prevent the proliferation of counterfeit currency notes, central banks spend more money to change the security features of existing currencies.
According to VenturesAfrica.com, Nigeria spends US$5.1billion on printing, moving cash annually. Similarly, the Bank of Ghana spent about US$26million to mint new currency notes while Kenya also spent US$141million dollars just to mint new currencies.
In response to some of these issues, central banks are reviewing national and international banking and payment architectures. One of the go-to strategies is the concept of Central Bank Digital Currencies on the blockchain.
Simply put, CBDCs are the digital version of national currencies like the USD, GHS, NGN and GBP among others CBDCs are created as an e-money, allowing individuals and banks to accept them for financial settlements.
Recently, there has been an upsurge in interest for central bank digital currencies, and some countries are mooting the idea of CBDCs while others are far ahead with the technical implementation. CBDCs present an alternative to the current centralised payment and settlement architecture that was discussed earlier.
For instance, about 90% of businesses in Africa are SMBs which engage in cross-border retail trading and production. In this light, a digital version of sovereign fiat currencies will provide a positive policy environment for the retail economy and commercial banks to leverage CBDCs for economic growth.
The choice of CBDC architecture
Central banks have two ways to implement a CBDC: Centralised and Decentralised. One option is to build a centralised digital currency whose token distribution and architecture are centralised at the central bank. This involves hiring or setting up a software development entity to develop and manage the CBDC’s technical architecture.
Central banks want to focus on policymaking and regulations other than becoming software development companies. While this is an option, it does not engender the trust and openness that citizens want to see their central banks’ operations. The second option is to build the CBDC on a decentralised architecture that allows the currency pool and exchange to be on a distributed ledger. For this case, building it on blockchain networks provides the decentralised benefit.
Blockchain projects already offer the platform to create digital currencies, which are exchanged for other currencies through decentralised networks. It would be prudent, therefore, for central banks to build their CBDCs on the blockchain. The advantages include leveraging open source software to deploy the CBDC without compromising safety and security of the currency.
Blockchain-based CBDCs offer the opportunity for interoperability with other cryptocurrencies; and lastly, the banks do not have to build and maintain the software architecture for this. It would appear the central bank managers are tilted toward a decentralised system for CBDC implementation, according to the 2018 OMFIF-IBM report.
Retail CBDC on the Algorand Blockchain
The Algorand blockchain supports both permissionless and permissioned architecture, which allows for central banks to build customised standard assets as CBDCs. With the pure-proof-of-stake consensus, it allows everyone to participate in validating blocks – thereby increasing security of the network. Currently, there are over 700 validators on the Algorand blockchain network, and it is designed to support a borderless economy where retail payments are fast and cheap.
It is ideal for central banks to leverage the Algorand core features to create the CBDC. CBDCs will be created as an Algorand standard asset, allowing them to perform instant and bulk exchanges using the atomic swaps feature, while the layer-1 smart contract is available to facilitate the trustless exchange of CBCDs among parties.
Financial reconciliation and settlement is instant, allowing banks to process interbank cross-border payments instantly. It also allows retail merchants to accept CBCDs as POS payments across borders with access to instant liquidity. One of the key challenges with cross-border payments has been the issue of chargebacks. When a transaction is disputed, it often takes days before the funds are resettled.
However, with a retail CBDC on the Algorand chain, it opens up the possibility for instant refunds using some of the key Algorand features.
For instance, commercial banks and payment companies building on the CBDC can implement escrow payments, asset clawback as well as the freezing of assets to handle all retail payment dispute scenarios. When there are disputes, accounts can be frozen until the dispute is resolved.
>>>the writer is the Co-founder and CEO of Sescash, a blockchain digital finance platform operating in Ghana and Nigeria. Since 2010, he has been at the forefront in building e-commerce and payments solutions. He can be reached on [email protected]