A system of shared IDs can globalize digital currencies

Relevance: Digital currencies are gaining global attention. Even an inter-ministerial committee (IMC) suggested to introduce National Digital Currency under the RBI.  


The major countries of the world are planning to issue their respective digital currencies whose success depends on the degree of global acceptance and transferability.  


  • Digital Currency is a direct claim on a central bank, like regular cash. FedCoin, e-CNY, digital euro, Britcoin etc. are some of the digital currencies that would be rolled out in near future.  
Issues associated with digital currencies: 
  • First, a system for ensuring seamless movement of digital currencies across global merchants is still not prepared by the monetary authorities. For this, they will need to verify identities of 8 billion people. 
  • Second, unlike cash, or cryptos like Bitcoin, digital money issued by central banks won’t be pure tokens. Either the issuing monetary authority or private players it tasks with the job will keep debit and credit accounts. Thus, persistent issue of tackling money laundering, terror financing, etc. would be there. 
  • Third, sharing identities across borders will become a complex task, jeopardizing a user’s privacy and augmenting secret surveillance. This won’t be accepted by countries like U.S and China who have significant trust deficit amongst them.  
Solutions proposed by the Bank for International Settlements (BIS): 
  • First, the simplest solution may be for different payment authorities to enhance compatibility of their technical and regulatory standards.  
  • Second, they (monetary authorities) can interlink their systems and share some interfaces, eliminating middlemen.  
  • Third, they can get together on one platform for their independent digital currencies. 

Each of the three approaches “would require increasingly intertwined identification schemes, but in all cases, ID would remain at a national level. 

Most Promising Model: 

  • The third model—a jointly operated payment system supporting multiple central bank digital currencies—is the most promising from a user’s perspective.  
  • After Hong Kong’s monetary authority began experimenting with the Bank of Thailand to develop a common platform, they were joined by China’s and the UAE’s central banks.  
  • The project is now called m-CBDC Bridge. Even in such a highly cooperative setup, a single ID system would not be needed. 

However, it’s unlikely that the US and China will agree to join their digital currencies, given their mutual distrust. For this, we need to rely on vaccine passport model. 

Vaccine Passport Model: 
  • The vaccine passport is a digital vaccination certificate issued for cross-border travel. It has a tamper-proof QR code, which can be read by immigration authorities. 
  • The certificate has an individual’s name and partially masked identification number. 
  • Upon scanning, the issuing country gives bare minimum information to immigration authorities and takes responsibility of the credibility of the certificate. 
  • Credibility is ensured by verifying an individual’s phone number and unique ID created by the issuing authority.   

Usage in Global Digital Currency Transactions: 

  • A similar system (like vaccine passport) could work for international payments with digital cash. Example: For a cup of coffee, it should be sufficient that a national authority has verified your identity and your claim of digital currency. 

Without this level of coordination, e-CNY, FedCoin, Britcoin and a digital euro will all remain trapped in silos, making them non-starters in a globalized world. This would also pave the way for the likes of Diem, synthetic private-sector tokens backed by reserves maintained in one or several official currencies. 


Source: Livemint  

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