Currency’s sovereignty in the era of CBDCs.

Paper or coin money is a legal tender. A legal tender is defined as “anything recognized by law as a means to settle a public or private debt or meet a financial obligation, including tax payments, contracts, and legal fines or damages”. When governments and central banks issue a currency they guarantee to the bearer of that note or coin that he/she should be able to settle, transact and pay for any goods or services to another party without any hesitation, as that paper or coin is guaranteed to be an accepted medium of payment or exchange. Cash, whether it be coin or paper, is physical. It’s as real as the sun and one can simply keep it in one’s pocket, bag or purse and make use of it when needed to transact. On the other side, CBDCs are digital. We can safely say that CBDCs are as real as the number one sees on a screen and depends on multiple factors to be readily available for use when compared to cash. We can argue all the day about the benefit of cash over CBDCs and vice versa; however, we will quickly come to the realisation that the two have relatively different pro’s and cons when compared to each other in terms of safety, accessibility or even ease of transacting. CBDC access factors include the need of a CBDC Wallet, which requires a device, and network access or connectivity, just to name a few. This article will try to explore how these factors previously not linked to currencies might affect the sovereignty of countries deciding to issue CBDCs.

To have a wallet, an individual has to fulfill two requirements: First, they have to be in possession of an electronic device, which can be a smartphone or a basic cellphone, and second, they have to have access to a CBDC ‘s application. For CBDCs application, two avenues are possible: Smart applications or Unstructured Supplementary Service Data (USSD) applications. Smart applications will be similar to those one has to get from PlayStore Or Appstore and USSD will be one which works over cellphone network layer and thus would be available to both smartphone holders and basic cellphone holders. As we can see from this migration to CBDCs, one additional layer is added to the access of one’s funds compared to cash. We can break this layer into small chunks. For Smart applications, there is a need for these apps to be hosted on an app distribution platform. It could be Appstore for IOS devices or Playstore for Android devices or even Huawei store for apps running under the Huawei Ecosystem. This layer ties the delivery and use of a central currency to other players who previously were not in the game. Their participation becomes crucial to the point that governments and their central banks have to rely on the willingness of these new players in order for the entire system to work correctly. It is without a doubt that part of a country’s financial or monetary sovereignty goes away when such a dependency is added. Don’t get me wrong: this dependence is needed, however, clear determination of roles and responsibilities among governments and these supporting tech companies have to be established in order for a successful delivery of CBDC solutions.

I know you would say, “not so fast my friend, isn’t most money already digital?” I already use my mobile banking application to settle my bills, or pay my rent or pay for a service. Yes sure, we all use those solutions but again existing banks have banking licenses they use to operate within their specific territory and, in turn, these licenses are issued by each country’s central authority bodies, which are controlled by the government. The question now is how many governments around the world have any kind of relationship with tech companies related to software distribution platforms such as AppStore and Playstore or even Huawei store. In the current scenario any banking entity that does not operate within the rules set by each country’s specific central bank will be dealt with accordingly and could even lead to the withdrawal of their banking license. However, what leverage could a government have if a specific tech company decides to withdraw its CBDC application from their marketplace? And if that happens, what would be the way forward for consumers in terms of accessing their money? With change comes uncertainty and each and every government would need to control the degree to which this uncertainty affects their economy.

With that said, we can all agree that the adoption and use of CBDCs will not be a walk in a park for countries, but rather an innovation that would see each and every government fight with new challenges — currency’s sovereignty being one of them. Hence, new regulations and legislation would need to be put in place to minimise this uncertainty as much as possible.

I hope you enjoyed reading this article. See you in the next one and, as always, feel free to leave me a comment.


HealthTech and Fintech enthusiast. Strong believer, supporter and critic of Central Bank Digital Currencies potentials and threats.

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Michael Ndjibu Lukusa

HealthTech and Fintech enthusiast. Strong believer, supporter and critic of Central Bank Digital Currencies potentials and threats.