Central Banks Globally Respond To Bitcoin With Their Own Digital Cash

July 2, 2021

Omidyar Network, a philanthropic investment firm backed by eBay Inc. founder Pierre Omidyar, announced in a press release on PE HUB its investment in eCurrency Mint (eCM), a Dublin-based company that has pioneered a new technology to enable central banks to issue digital fiat currency, called eCurrency.

Funds raised in the Series C round led by Omidyar Network will open eCM technology for central banks globally to evolve their national currencies efficiently and securely and keep up with the digital world.

The investment was made through the firm’s Financial Inclusion initiative and is part of the overall strategy to support innovative technologies to massively increase the reach and scale the impact of affordable, convenient, and flexible financial services to consumers and small businesses globally.

As Tilman Ehrbeck, Partner at Omidyar Network, commented on the investment in the press release, “Paper-based money is becoming an antiquated tool in an increasingly digital economy. Those who rely heavily on cash to conduct their financial lives are often locked out of the formal financial system and the opportunities it presents. eCurrency can help accelerate financial inclusion by turning today’s digital value systems into sovereign-backed national currencies, increasing trust, and addressing key issues currently hindering the adoption of digital value systems, such as interoperability.”

Government and taxpayers will also benefit from eCurrency as it is ten times cheaper to mine and distribute eCurrency than paper money, with its costs to produce, secure, and distribute. The solution promises to work seamlessly across all existing payments systems and current infrastructures. In addition, it is customizable to comply with country-specific legal requirements as 30 central banks globally have participated in creating the eCurrency, which was tested in several countries.

Jonathan Dharmapalan, founder and CEO chief executive of eCM, provided more details to WSJ on the pilots, saying that eCM has reached agreements with two central banks to transfer to them the technology necessary to issue the currency.

Mr. Dharmapalan also shared his insights on the value of eCurrency, saying, “As technological advancements have connected people globally, the payments industry has provided them with better, digital ways to transact. If we think of digital transaction platforms as a system of pipes, then mobile has added the last miles of these pipes, and the internet is reaching people at the farthest corners of the world. But as this digital revolution has been taking place, the issuance of currency has essentially remained the same. eCurrency will enable central banks to issue a single, safe digital currency instrument running through these pipes, making the entire system more secure, transparent, efficient, and, more importantly, trustworthy, as it is now backed by the country’s central bank.”

How eCM works

The difference between eCurrency and various forms of private sector digital value available today is that eCM is issued by a central bank and has the same legal and monetary status as notes and coins. Moreover, eCM is an end-to-end solution that combines hardware, software, and cryptographic security protocols to enable a country’s central bank not only to issue digital fiat currency but also fully manage its operation, including the ability to monitor its movement through payments systems in near-real-time, as explained in the release.

Once acquired by a country’s central bank, eCurrency can only be minted by the central bank offline. Each unit of eCurrency consists of a “cryptocomplex,” a self-contained security instrument made up of many layers of security technology, uniquely bound together to ensure that the eCurrency cannot be counterfeited or compromised. eCurrency’s security features can be updated in real-time to stay ahead of threats.

After eCurrency units are created, they are transported in digital form within a secure storage device to payments systems through the same delivery mechanisms as for notes and coins. eCurrency then gets loaded into the systems of financial institutions and is made available publicly to perform transactions.

Security of eCurrency is ensured by a self-aware, unique identifier, which makes it easy to track all movements of the eCurrency through payments systems in almost real-time.

What are the economic implications?

Central bankers’ interest in digital currency is a logical reaction to the rise of Bitcoin and the global trend of shifting from physical cash. Since the boom of FinTech, which has been recently shrinking banks’ profits, banks have been looking for ways to respond. eCM could be the most important and effective response.

An example of a study by Moody's was mentioned in the press release, which indicated that the global shift to digital transactions boosts economic growth with electronic payments adding $983 billion or 0.17% annually to economic growth across 51 countries, accounting for 93% of global GDP between 2008 and 2012.

Another study by Citigroup and Imperial College cited in the release estimates 10% growth in the adoption of digital money across 90 countries, which will bring 220 million more people into the formal financial sector and add $1 trillion of new flows to the formal economy. It will also contribute another $150 billion to consumer spending and $100 billion more in tax collections.

Kennedy Komba from the Tanzanian central bank and member of the Alliance for Financial Inclusion, a global network of financial policymakers, shared with the WSJ that he had met with eCM and believes that central bank-backed digital cash has a lot of potential.

Kennedy presented an example from Africa to WSJ, saying that mobile phone payments have grown rapidly. However, physical money backed by the government is still crucial. If a mobile phone customer in Tanzania wants to put money in the account, he often must deposit cash. If that same consumer wanted to pay to another person who didn’t have the same phone company, he would have to withdraw cash. For making all that happen, banks and phone companies have to maintain overhead and ensure security for the cash. Bringing in digital currency instantly cuts the costs and makes the whole process easier. In the end, cost reduction for companies will lead to more affordable financial services for customers.

What does this mean for consumers?

As mentioned earlier, a significant reduction of costs affiliated with physical cash will potentially make financial services in developing countries more affordable to end users.

In addition to that, digital currency erases any acceptance barriers. Having $100 dollars in cash makes it usable only in places where cash is accepted. Having $100 in a digital currency backed by a central bank allows it to be spent anywhere.

WSJ added another interesting implication, shared by the economist Andrew Haldane, the chief economist of the Bank of England. Mr. Haldane commented that the widespread use of digital cash could create new possibilities in interest-rate policy at a time when existing monetary policy tools are being pushed to their limits to boost the global economy.

The absence of physical cash would also affect consumers’ ability to withdraw funds if interest rates are set not in their favor. If financial institutions currently can’t push negative rates, then with digital money, consumers will have even less power over the funds.

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