Dec 8, 2022

The Government's role in digital Currency - Future for Farce?

Dilip Ramachandran
7 min read

Nayib Bukele, the self-proclaimed "CEO of El Salvador," "Blockchain influencer," and president of the Central American country with a population of $6.5 million, declared Bitcoin as a legal tender in September 2021.

Bukele used government funds to buy close to $100 million in Bitcoin, plunked ~200 Bitcoin ATMs in every town plaza, and required businesses to accept it. To jumpstart the flywheel, he provided each citizen with $30 worth of Bitcoin to help them start transacting.

The make the world even more excited, Bukele committed to building a Bitcoin city (to rival Dubai) near the Conchagua volcano, where energy from Mother Earth would be harnessed to power mining.

A year in, the move has been failing. Many issues are due to poor product quality and a rushed go-to-market. The rails didn't perform in a real-world application, from fraudulent signups (20%), prolonged transaction times (3 minutes to transact), and non-functional ATMs and QR codes - it just wasn't usable.

A year later, there hasn't been much fixed with the app.

There was also fraud as users manipulated pricing delays in the app to buy and sell Bitcoin to make a profit - one trader exploited the bug to make as much as $400,000.

One of the reasons for the push for Bitcoin as the country's digital currency was to reduce or eliminate fees for cross-border remittances. In the first five months of 2022, only 2% of remittances went through Chivo.

It certainly didn't help that Bitcoin has dropped over 67% YoY.

With the entire meltdown in the crypto market due to the FTX fiasco, is the idea of digital currency dead?

Is CBDC an alternative to Bitcoin?

The Fed refers to CBDC (Central Bank Digital Currency) as very similar to digital balances held by commercial banks (e.g., Chase, Wells Fargo, SVB) today, except that it would be a liability of the Federal Reserve, not of a commercial bank.

Another critical difference between the CBDC and Cryptocurrencies such as USDC (Stablecoin) or Bitcoin is that it uses a permissioned blockchain (only the central bank and authorized parties can view transactions). In contrast, Bitcoin uses a permissonless blockchain. There isn't a blockchain in some cases, such as the digital Renminbi.

The Fed informed the public of their intentions on the CBDC project in the Money and Payments: The U.S. Dollar in the Age of Digital Transformation paper issued in January 2022. This fits into the FedNow and Faster ACH roadmap, scheduled to go live in 2023. These infrastructure components mitigate digital currency risks in El Salvador by providing real-time low-fee payments and a more robust ledger than the current daily settlement system.

Another goal of the CBDC is to simplify cross-border payments and extend better financial services to the unbanked (5% of US households).

India's interest in Digital Currency

While the El Salvador story is a real downer, the 2016 Indian banknote 2016 Indian banknote demonetization paints a different tone on the future of digital currency. While initially used as a tool to curb counterfeit and black money, it ended up helping India catalyze digital payments during the COVID-19 pandemic.

As for eliminating cash, while 86% of cash currency (CIC) went out of circulation in 2016, five years later, in November 2021, CIC was up 65% compared to pre-2016 numbers.

For political reasons, the Reserve Bank of India (RBI) continues to have a tight grip on monetary policy and financial innovation (especially crypto) to curb any loophole for counterfeit money.

India has been running an e-Rupee pilot for more than a month now with commercial banks. They have been using the currency to settle trades in government securities. The early sentiment is that India's digital rupee fails to excite interest. Commercial banks will choose not to continue the trial when the pilot ends due to the low volume, increased accounting overhead, and lack of benefits. A little bit more research revealed these additional titbits.

On Dec 1, the RBI initiated the consumer pilot for the e-Rupee.

This pilot is limited to four local banks and four cities. After the pilot project's success, four banks and nine cities will be added, covering 1.3 million miles of land area and 1.4 billion Indian residents.

The real question for Indian consumers is whether the e-Rupee is superior to UPI? Early implementations seem surprisingly friction-laden and inferior to UPI. Here's the tutorial created by the SBI (State Bank of India) on how to use an e-Rupee wallet.

Validated by the lackluster traction in CBDCs in neighboring nations of Singapore, China, and South Korea, I think feature parity with existing payment methods (UPI) isn't enough. There needs to be a killer cross-border feature for consumers to adopt it at scale.

CBDC Pilots in the US

There's no chance a digital currency backed by a Federal Reserve in the United States would consider breaking the fourth amendment. Right?

Well, maybe not - it turns out Congressman Emmer (R-MN) is leading an inquiry with eight other lawmakers into "Project Hamilton," the Boston Fed digital currency. This pilot was performed in partnership with the Digital Currency Initiative at the Massachusetts Institute of Technology (MIT).

As described before, while CBDCs use permissoned blockchains or non at all, Emmer argues for permissionless blockchains in the spirit of transparency. He cites that there needs to be transparency in the process and disincentivize surveillance of individuals.

Emmer feels that Project Hamilton is using public funds to create unfair advantages for private players. Public funds need to be used for any "central bank currency." Does it develop benefits for commercial banks? It may, but in my opinion, no more than what commercial banks already do with their existing products.

One factor that I want to pay attention to is the response letters to the Fed's January 2022 Money and Payments report - 65% of the letters received from the public cited concerns around privacy. Does a CBDC infringe on consumer privacy? Is permissionless the solution?

This is where the right to privacy becomes fuzzy. I agree that the government shouldn't see what I'm doing with my money. At the same time, I don't want my neighbor to know my car payment just because I paid her for the coffee she got me.

Digging a little deeper, I can see Congressman Emmer has introduced a bill to block CBDCs, which helps explain his inquiry into the Boston project.

There's another initiative - between the New York Fed and the New York Innovation Center (NYIC) called Project Cedar. Their phase one test has focused on using distributed ledger technology for FX spot settlements in under 10 seconds - paving the way for new cross-border infrastructure. Much better than the current two days for spot transactions to settle.

Is the e$ good for you?

Stablecoins have been a bridge between Fiat (government-backed currencies such as USD or EUR) and Cryptocurrency. Stablecoins are digital currencies and behave as such (transactions stored on the blockchain). The distributed ledger can be permissioned or permissionless depending on which exact blockchain the transactions are on. This is constantly evolving as we continue to learn by speaking to representatives at Circle and Stellar.

Stablecoins such as USDC also have no "geographic jurisdiction." USDC, issued in Oakland, CA, can be used for payment in Athens, Greece, or Colombo, Sri Lanka. An e$, on the other hand, in a US digital currency will need to be "integrated" with the Greek and Sri Lankan central bank-issued digital tenders for spot settlement.

Let's tabulate what we've learned about the risks of consumers adopting digital currency, such as the Fed's CBDC, e$.

Concern Type Scenario My Take
Lower transaction costs and faster settlement Benefit Through FedNow, and other participating services, bank transfers will be cheap and instant.

🤔Zelle, EWA (earned wage access) and push-to-card payments have already solved the problem for consumers. The question for institutions is if there is enough operational efficiency trade-off to implement this.

The only way to push the implementation cost is through governmnent subsidies and regulatory mandates( which is likely). 

Cross-border spot settlements Benefit Moving FX between borders will be significantly simpler using interoperability between CBDCs vs. nostro vostro or SWIFT type networks. 🤗 The most exciting piece about CBDCs, and probably will receive significant friction and opposition from the existing dominant players in cross-border finance - Visa and MasterCard.
Gov't surveillance


Yes, it is possible that government agencies can impose restrictions. For example, the USDA could precisely control which merchants can accept food stamps, and which products can be purchase. The concern is what checks and balances will be in place to avoid collusion between the USDA and Nabisco.

🧐 The USDA already has rules, MCC restrictions that merchants must follow. There are also product restrictions to EBT that's already in place in the terminal software. I think this is risk is one of a philosophical nature.

The availability of CDBCs and how easy it would be to move funds could enable bank runs and amplify financial stability risks.

We would require the Fed to backstop these risks with controls and policy.

Financial inclusion


The idea is that anyone and everyone will now be able to have a bank account and therefore affiliated products such as credit scores which will provide access.

Additionally, the risk of safeguarding cashing is eliminated.

👀 This can be very good for non-banked consumers, as long as there is sufficient investment in financial wellness so that consumers don't extend too much credit, or that private organizations abuse this segment of the population.
Financial innovation


eDollar users will expect the Fed app to provide financial products in the same page as where the money is stored.


🙋 I think it is extremely unlikely that any government agency will match the product innovation in banking exhibited by players like Cash App. Therefore, I think it is essential that the Fed app offers extremely simple on-ramps and off-ramps for the e$ between banks and nonbanks.

In short, economic agents beyond the Fed will need to be able to "store" e$ value for it to be a viable currency and it will need to be designed with "open banking" in mind.

Environmental impact


Coins and cash can be used today without electricity or an internet connection or digital devices.

They can be used to perform a transaction quickly in the "middle of nowhere."

The e$ will be energy intensive.

🤨The logistical challenges of printing, securing, safeguarding and moving cash is non-trivial.

I couldn't find enough data to compare that to the cost of running a blockchain, but I'm willing to bet that over time with the right investment in blockchain tech (as we saw in Etherum v2) we can see a decline in energy consumption.

CBDC Opposition

We have already discovered a handful of congresspersons, a particular IMF Director, and a Swedish journalist strongly opposing CBDC.

Peter Imanuelsen IMO is polarizing some of these concerns. The DO Black Mastercard is taking Aspiration's vision one step further. It's a credit card. Don't apply for it or use it if you don't like it. Companies will build what consumers ask for.

Now what's happening in Turkey is undoubtedly something that has many consumer advocates concerned. They are tying the digital Lira to government identification. Beyond KYC, I don't think this is necessary for a CBDC to be successful, so this is just an implementation out of desperation for a deflated Lira that will not age well.

The only difference between the e$ and the DO Black Mastercard is that you can't opt out of the digital dollar. It's an all-or-nothing thing for it to be successful. So it has a profound impact on how we store our currency. Despite this precondition, I've found the opposition to it to be lackluster.

The Clearing House (TCH) has stood up for bank rights, opposing the CBDC. Given that the ICBA also Opposes U.S. Central Bank Digital Currency, my only conclusion is that this opposition has more to do with the war of ACH vs. FedNow than the CBDC itself. Making the CBDC ubiquitous for money movement between banks and supplier and vendor payments on the FedNow rails would eliminate ACH and the primary purpose of TCH.

Of course, this wouldn't be an easy thing to unravel for anyone who knows how hard it is to implement, maintain and run an ACH service with minimal fraud.

Dante Disparte (CSO, Circle) recently shared his take on CBDCs.


Further reading:



Conclusion - we may not have a choice.

I agree with the concerns about privacy, the digital dollar's environmental impact, and government surveillance risks.

I also agree that the customer experience isn't going to change that much. Institutions and private nonbanks might improve operational efficiency if the e$ is designed with "open banking" in mind.

The real question we might face is whether the Federal government should step aside before a private organization with extensive reach and market capitalization such as Apple tries to issue its digital currency.

It's clear that while Circle's USDC is backed with the United States Dollar, what will stop them from issuing their currency? What about Binance? And what interests will those private organizations have?

Who will ultimately be left behind?

Back in El Salvador, more than 100,000 people are behind bars during the country's state of emergency is a reminder of the consequences of the country opting for Bitcoin's assistance instead of the International Monetary Fund's USD loan and austerity measures.

We know how this story played out in Sri Lanka.

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“Challenge the boundaries and get out of your own way”

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Dilip Ramachandran

Entrepreneur, Author, Dad and Product therapist

Dilip Ramachandran has over 15+ years of building teams, shipping delightful and highly successful enterprise software products in MarTech and FinTech at companies like Walmart, Experian, Marqeta and Bond.

Dilip wrote Gangsta Vision to help folks in product management to figure out their path and a plan to break into senior leadership.

At Nimi, Dilip is CEO and Chief Product Therapist helping high-growth FinTech startups with product and payments advisory and matching them with highly reliable and skilled experts in Sri Lanka. Learn more about Nimi at

Dilip has a Bachelor’s in Electrical Engineering from the University of Pennsylvania and resides in Oakland, California with his partner Alla, daughter Ariadna and son Wiley (a papillon-sheltie rescue). The family occasionally travels to Colombo, Sri Lanka for his work with Nimi.