CBDC Potential: Why "Third-World" Countries Lead

The creation and advancement of blockchain technology are drawing the attention of central banks worldwide to varying degrees, particularly regarding the development of Central Bank Digital Currencies (CBDCs). While countries like the US, Japan, and the EU are engaged in discussions regarding regulatory frameworks, certain developing nations (and others, such as China with its digital yuan) are already actively implementing CBDCs.

Why? Let's take a closer look at this article.

Better Control over Monetary Policy

CBDCs offer central banks a better way to manage monetary policy, especially in countries with high levels of cash use (eg countries in Africa and Asia). In developing countries, cash dominates and central banks have limited control over the amount of money circulating in the economy. By implementing a CBDC, governments can better control monetary policy and promote financial stability. They may also offer new financial product options such as deposits and investments.

Of course, here lies another secret to the rapid adoption of new technologies. The decision in most cases is taken by one person or group of people, as happened for example in El Salvador, where the initiative of the young president was accepted by the "parliament" and immediately adopted. This has both pros and cons. Such as money printing (but of course, countries with "tough" governance are quicker to introduce new economic systems.)

Lack of Financial Infrastructure

One of the reasons why developing countries have an advantage in implementing CBDCs is the lack of proper financial infrastructure in these countries, such as the difficulty of obtaining loans, loans, etc. Traditional banking systems can be expensive, unreliable, and out of reach for many people living in remote and underdeveloped regions.

Also, these countries are affected by political bias in the form of state coups, sanctions, and a high criminal situation.

The introduction of CBDC may solve the problem in part by providing a cheaper and more accessible alternative to traditional banking. Emerging economies can build their financial infrastructure around CBDCs, leading to a faster and more efficient financial system.

Adoption of Mobile Payments

Another factor that makes third-world countries more suitable for CBDC implementation is the widespread adoption of mobile payment systems. Many developing economies have leapfrogged traditional banking systems and adopted mobile payments at a much faster rate than developed economies. In Africa, for example, mobile payments account for over 45% of all transactions, and the Asia Pacific Mobile Payments Market is expected to grow at a CAGR of 23.91% over the forecast period (2022 - 2027) of all financial transactions. This widespread adoption of mobile payments provides an enabling environment for the adoption of CBDCs in these economies.

High Demand for Financial Inclusion

Financial inclusion is an essential element of economic growth, and many developing economies lack this aspect. Governments in these countries are increasingly becoming aware of the critical role that financial inclusion plays in economic development and are taking steps to ensure that people have access to financial services. The introduction of CBDCs offers an excellent opportunity to address financial inclusion in these countries. By providing a decentralized financial system, CBDCs could help people in remote regions access financial services, making them an attractive option for governments seeking to provide financial inclusion.

Reduced Risk of Financial Crimes

Developing economies are often more vulnerable to financial crimes such as money laundering and corruption. The introduction of CBDCs could help to reduce these risks significantly. CBDCs could provide better traceability of transactions, making it easier to identify and track suspicious activities. Additionally, CBDCs could provide a more secure financial system, which would reduce the risk of fraud and other forms of financial crime.

Diversity in Economic Models

Developing economies’ economic models are often different from those of developed economies. These differences lead to unique requirements and opportunities for CBDCs' implementation. Developing economies that rely heavily on remittances, for example, could benefit significantly from CBDCs, as these currencies could help to reduce transaction costs and make remittance transactions more secure.

After all, as we know, most of the citizens of these countries work in more developed countries and they are more interested in transfers to their "homeland" than others. It is also an incentive.

Between Scylla and Charybdis

The current banking systems do not withstand heavy loads and instantly exchange information with each other, these systems are outdated and require updating. And this is where technology comes to the rescue.

Now there are several solutions on the market that can help with scalability, I will not list them all, I will highlight the two main ones in my opinion that can help solve.

EVM - L2/L3 Solutions.

"Layer 2” solutions are blockchains built on top of (or in parallel with) the Ethereum blockchain that is used to scale its capabilities. These chains usually process many more transactions per second for much less in fees.

So let's move to the structure of the EVM. Layer 1 (L1) of the main Ethereum network:

- The Ethereum Core Network serves as the base layer and core network of blockchains. - It processes smart contracts, maintains network state, and secures the entire system through consensus mechanisms such as Proof of Stake (PoS) or Proof of Work (PoW).

Next, we move on to the Layer 2 (L2):

- L2 solutions are built on top of the main Ethereum network to offload most transaction and computational tasks, improve scalability and reduce congestion.

- One popular L2 solution is Ethereum Virtual Machine (EVM) compatible sidechains such as Optimistic Rollups or Plasma.

- Sidechains are separate blockchains that are compatible with the main Ethereum network and can process transactions in parallel.

- These L2 solutions benefit from the security of the Ethereum mainnet and periodically send aggregated transactions to the L1 mainnet for final verification.

Also in Ethereum, there are solutions of the Layer (L3):

- Tier 3 solutions build on top of Tier 2 solutions to further increase scalability and support even more complex applications.

- L3 solutions may include state channels or state networks, where transactions are carried out off-chain between participants, and only the final state is recorded in the chain.

- This approach reduces transaction costs, increases the speed of transactions and improves confidentiality.

- Public channels and networks can be created for specific use cases such as decentralized games, microtransactions, or any application that requires frequent interaction between participants.

They can also interact in addition to Ethereum with other networks (BSC / TRON), which together further increases the “flexibility” of the solution through inter-network interaction.

The architecture of L2/L3 blockchain solutions on Ethereum is designed to scale the network, reduce transaction costs, and improve overall performance while maintaining the security and decentralization provided by the main Ethereum network. These solutions enhance the usability and practicality of blockchain technology by removing the limitations of the base layer.

TVM - Mulitsharding Solution.

What is TVM?

TVM — Threaded Virtual Machine — is a machine that is used to execute smart contract code in a masterchain or in a workchain. A change in the state of the blockchain can only occur through the execution of a smart contract. Smart contracts interact with each other and users through messages that are organized in a single queue.

This technology is used in TVM-compatible Everscale, Venom, and TON blockchains.

Below you can see an example of how multi sharding works in these blockchains (for example Everscale👇)

A CBDC using sharding technology will be able to process a large number of transactions at high speed, ensuring the smooth operation of the system. CBDC will be able to operate more stable and secure as TBM blockchains are highly decentralized, which provides protection from hacking and interference from intruders.

Thus, the use of sharding technology in TVM-based CBDC will create a reliable and efficient system that can efficiently process large amounts of information and provide users with high speed.

The introduction of such a system will help third-world countries to implement CBDC faster and gain an advantage in the long term compared to “first tier” countries that have not gone further than discussions.

Conclusion

It is not yet clear which L2/L3 vs TVM solution will eventually become the catalyst for solving the CBDC scalability problem, but the fact remains that these technologies will not be forgotten, but will become the foundation of something bigger.

The introduction of CBDCs is becoming increasingly popular worldwide, with many countries exploring the potential benefits and challenges. While developed economies may have an initial advantage in terms of financial infrastructure and technology, developing economies have unique requirements, making them highly attractive for CBDC implementation.

The widespread adoption of mobile payments, high demand for financial inclusion, better control over monetary policy, reduced risk of financial crimes, and diversity in economic models all make developing economies excellent candidates for CBDCs adoption. Therefore, CBDCs will play an important role in shaping the future of global finance, especially as developing economies continue to grow.

Which country do you think implements CBDC faster than others in your opinion? Write your thoughts in the comments👇