Will national digital currencies disrupt the entire global economic set-up?
What could be better for a government than a national currency that shows no tendency of losing its value? A currency not affected by any external factors, be it an unstable economic situation or an uncertain political environment, has a good chance of becoming the dominant one on a global scale.
The possibility of launching Central Bank Digital Currency (CBDC) was initially inspired by Bitcoin but has transformed into a separate concept ever since. According to the research led by the Bank for International Settlements, it’s only a matter of time before CBDCs become a part of our reality. Out of 65 central banks that took part in the survey, 86% admitted exploring digital currencies’ pros and cons. And there more to it: apparently, regulators of the developing countries are keener on the idea of issuing their “national crypto” as they need the accessibility and efficiency of payments CBDC can offer.
What will this currency look like, and is it really going to benefit the population?
The Perk of Central Banks Digital Currencies
If Bitcoin was created to derail the current banking system, why would central banks even consider issuing their own digital currencies? Because the intention behind CBDC is different. Unlike the wild and free Bitcoin, national digital currencies will be strictly regulated, curated by the states, and backed by reserves. The tech behind cryptocurrencies makes them a highly efficient tool that can contribute to a country’s economy, so ignoring it wouldn’t be wise at all.
What exactly does this tech have to offer?
Cross-border payments, regular money transfers, and any other processing matters have the potential to become way faster when backed by blockchain tech. Bypassing intermediaries such as corresponding banks or clearing houses and using peer-to-peer networks can speed up the process of transferring value significantly.
When it comes to security, the distributed ledger technology is second to none. Advanced coding, high-level encryption algorithms, and immunity to attacks are definitely the tools you want to use to keep your money safe.
Ever heard of banking the unbanked? 1,7 billion adults – about a quarter of the world’s population – have no access to banking services. People who live in rural areas of Asia and Africa don’t often have a way to open a bank account. However, many of those people do have mobile phones, and national digital currencies can become their sheet anchor.
Cash is not cheap. Physical bank branches are costly. All the people that work in the banking sector are expensive. CBDC can help with lowering the expenses that modern banks bear to operate.
To sum it up, by implementing the CBDC model governments will gain an additional tool to fight corruption, money laundering, and other illegal activities. Also, CBDCs could provide essential data on the economic activity in a country. As for the citizens and businesses, they will be able to settle their financial operations more efficiently, much faster, and a lot cheaper.
Why CBDCs May Not Work?
How do you call a centralized cryptocurrency? A digital currency! Chances are that once the governments lay their hands on fintech, it won’t come out as revolutionary and progressive as one would hope for. If the state chooses to design its national currency and leave the blockchain foundation behind, it might have to say goodbye to all the goodies that come with it. Make it centralized and lose the speed. Or come up with an alternative design.
Some CBDC critics point out that national digital currencies could be used by states to control their citizens. The idea of issuing a transparent and traceable national currency in a country with a strict communist regime doesn’t sound too liberating.
Besides, transitioning to a fully functional banking system powered by a digital currency will be pricey. From building dedicated wallets to handling KYC/AML policies, monitoring transactions – not to mention the development of regulatory framework – it’s not going to be cheap.
And then imagine what will happen if people decide to withdraw their CBDC deposits in large volumes? Banks would have to develop an alternative plan to support themselves, like raising interest rates on deposits or loans.
The Bottom Line
As of now, no single country has gone all the way with issuing its own national digital currency (nevermind Venezuela with its Petro, it’s clearly not a CBDC what they have come up with). But we’re getting there. Government authorities in Estonia, Japan, South Korea, Singapore, India, Germany, Thailand, Israeli, Canada, Norway, Sweden, Hong Kong, Switzerland, Russia, China, the UK, and others have made statements regarding the upcoming CBDC issuance.
Undoubtedly, it will take a while before the world sees its first national digital currency, and we can only guess what it is going to be like it. Decentralized? Efficient? Well-designed? The time will tell.
Digital currencies definitely have the power to reduce the load on the country’s banking network and help with controlling electronic money flow. However, they will hardly be a competitor or an alternative to Bitcoin and its cousins. The thing with CBDC is that it’s not really an asset or a speculation tool but a technical standard; a very practical standard aiming at simplifying and liberalizing financial arrangements to a certain point.