Crypto purists probably balk at the idea of a Central Bank Digital Currency, if only because it flies in the face of cryptocurrency’s ‘raison d’être’. As Kraken’s CBDC report says, “While the concept of CBDCs was
inspired by cryptocurrencies like bitcoin, the ethos of CBDCs show a stark contrast from the ethos of cryptocurrencies in that they are issued by the state as a centralized form of digital money.”
The growing popularity of bitcoin, as well as Facebook’s proposed venture into digital assets with Dien, spurred governments to consider creating a digital version of their sovereign currency. While most countries are still at the research phase, a few, such as China, are already piloting CBDC programmes. Whilst this may be a slow process, it looks as if the global rise of CBDCs has begun.
How can a CBDC benefit a country?
According to the BIS’s quarterly report,3 retail CBDCs may help overcome the limitations of national payment systems and act as a convenient and affordable payment method of transferring funds across accounts held at different Payment Service Providers (PSPs) while reducing the costs and inefficiencies associated with low interoperability. Another use case is in areas where access to cash is limited, and a CBDC would guarantee access to central bank money.
Why CBDCs are gaining popularity now
The COVID-19 outbreak hat started in early 2020 prompted governments and central banks around the world to start directing their attention to CBDCs as the advantages of having a digital currency that is easily accessible and distributable became apparent. Latin America is one region where cashless methods of payment quickly became popular and it noted a fast decline in cash withdrawals following the emergence of the pandemic, alongside an expansion of mobile, phone and internet banking use.
What else are CBDCs good for?
Mass adoption of CBDCs would greatly assist governments and make it far easier for them to track transactions; something they can’t do with fiat money in cash form. This would allow them to have real-time updates about economic activity. It would also allow payment systems to operate more efficiently by offering almost instant settlements at lower costs than present. Both of these have a significant appeal for central banks. The one factor that has less appeal is the possibility that hackers would find it too easy to attack digital wallets, so security is a big issue to be resolved.
Taking all these things into account, it is likely we will see more regulatory discussions around CBDCs, digital wallets and blockchain. Merchants and business too will have to adapt their payment systems to facilitate digital currency transactions.
Every day we are seeing announcements from the different regions of the world as individual countries make their move on CBDCs. Chinese internet, fintech and e-commerce giants are leading the digital yuan vanguard and the Bank of England indicates it is moving ahead with one by posting job ads for seven positions ranging from solution architect to senior manager. South Korea will pilot a CBDC later this year, and the European Central Bank is pursuing the idea of a digital Euro.
But, one thing all central banks will have to over come is there aversion to decentralization, because for CBDCs to succeed, they need to grasp “ the most revolutionary aspect put forth by cryptocurrencies and blockchain tech as a whole,” which is decentralization. Public trust in centralized control of the banks has been eroded, so centralized CBDCs are unlikely to have mass appeal.
As, Sky Guo wrote in Cointelegraph last month: “It stands to reason that there truly does exist a real window of opportunity for the creation of digital currencies that are decentralized in their governance and overall scope of utilization, “ adding “Another point to consider is that centralized blockchains are still relatively slow, thus the use of decentralized solutions, such as distributed ledger technology, stands to make CBDC transactions much faster and far more streamlined.”
It is perhaps too early to make an exact call on the future of CBDCs, but there will be a future for them, and that’s all we need to know right now.