The moment the Lebanese Central Bank announced its intention to issue a new digital currency, the news was all over the local social media pages. On the first week of November, the governor of the Lebanese Central Bank, Mr. Riad Salemeh, announced that the Central Bank plans to issue a new digital currency with the aim to reestablish the trust in the Lebanese financial sector and pushing towards a cashless payment system in Lebanon, in response to the latest financial crisis and deficits in cash money in foreign and local currencies on the market.
It is not completely new for central banks to shift towards digital currencies mostly known as Central Bank Digital Currency (CBDC). Actually CBDCs are currently a hot topic. A study by the Bank for International Settlements (BIS) from January 2020 shows that 80% of worldwide central banks are engaged in CBDC-related research. The percentage of central banks that run experiments or proofs-of-concept is also growing, reaching almost 50%. Moreover, 10% of the surveyed central banks plan to introduce a generally available or retail CBDC in the next three years and 20% in the next six years. Therefore, CBDC efforts are very dynamic and are expected to even increase in momentum within the next few years.
China’s central bank (PBoC) was one of the first central banks to focus on the development of a CBDC, forming a special task force for that mission in 2014. In April 2020, the project gained traction as the testing of a CBDC prototype was announced. Currently, the prototype of the Chinese CBDC, called DC/EP (digital currency/electronic payment), is tested by the private and also by the public sector. Already the Chinese Government decided to pay out, 50% of the mobility subsidies for employees in the public sector, directly onto each employee’s personal digital DC/EP wallet. Further testing was announced to take place during the Winter Olympics in 2022.
But what is out of the usual is to see a central bank issuing a new currency in a market that is already suffering from the excess of unjustifiable currencies. Even before the economic crisis that started in September 2019, the market was already suffering from the duality of adopted currency, Lebanese pound and U.S. dollar. And as the economic crisis deepened, banks tightened the limites on both local and foreign currencies withdrawals which led to the appearance of new virtual currencies to reflect the new value of non-cash Lebanese pound or U.S. dollar amounts in the form of bank checks or bank accounts. The most famous virtual currency is the Lollar. A Lollar is a US dollar that is stuck in the Lebanese banking system, really just a computer entry with no corresponding currency. The term was coined by Harvard economic fellow Dan Azzi after a severe economic crisis in Lebanon.
Lebanon is facing an unprecedented economic crisis and the local currency has already lost about 60% of its value. A normal outcome of economic crisis is to creat a rift in societies which become obliged to redefine old economic practices and, in the same time, to design new ones. Many new forms of money have been developed and emerged as a result of economic crises. Currencies do not only exist in their traditional form, they can be redefined.
Perhaps the best example to consider in this case is the Sardex currency. When the financial crisis hit Sardinia, a group of local friends decided that the best way to help the island was to set up a currency from scratch. So there it was the Sardex currency, an initiative launched in response to the economic decline that affected the island of Sardinia, Italy, in the aftermath of the financial crises. In 2010 four young entrepreneurs with little background and experience in finance or business launched the initiative as a limited liability company (Sardex s.r.l.) to leverage collaboration and network effects for the benefit of small and medium sized enterprises (SMEs) on the island. The primary aim of the initiative was to provide employment opportunities within the local economy of Sardinia by supporting local businesses. The Sardex is a hybrid form of money: it is a cashless e-money and it is a local money used only in Sardinia. Thus Sardex credits are not a currency and they don’t compete with the Euro. Unlike the Euro, Sardex credits have a very specific function: supporting local businesses in Sardinia. Participation in the Sardex network provides businesses with a credit line in complementary currency that can be used to purchase goods and services within the network. The credits are denominated in Euro but cannot be exchanged for Euro or bought with Euro. Transactions are executed via an online banking site or a mobile phone application that also produces account statements or functions as a point-of-sale payment station that identifies payer and payee through the use of QR-codes and the mobile phone’s camera. For offline payments, a check book is provided to record and submit payments to be executed at a later point. For taxation and accounting purposes, all income in Sardex is declared as equivalent to income in Euro. By 2017 the transaction volume of Sardex had surpassed 212 million units worth the equivalent value in Euro.
Thus, in the case of Lebanon, where the country is facing its toughest economic crisis ever, is a new digital currency to be added to the existing wide portfolio of fiat and virtual currencies a true solution or a redefined currency that aims to improve local commerce which have been struggling because of both global, local and national economic problems, might be the remedy long waited for to re-spin the economic wheel. What is for sure is that we need a currency that stimulates growth of the local economy and not just another currency.