June 09, 2021 |James Messi
Central Bank Digital Currencies (CBDC) refer to digital versions of existing national fiat currencies. The prospect of central banks around the world creating their own digital currencies was gaining steam and began to stall as the global economy was hit by the pandemic. As we are working our way out of the pandemic and seeing an increasing interest in digital assets, central banks are once again working to create their own digital currencies.
Cryptocurrency investors are hoping to see more interest in CDBC issuance in the not-so-distant future. Despite the recent bitcoin crash, cryptocurrency adoption is seeing exponential growth without any signs of slowing down. This in part due to CBDCs steadily gaining popularity with banking institutions and national governments. The Chinese government’s plan to eradicate the use of cryptocurrencies in the country is setting the stage for their own CBDC. A recently released study stipulates that 60 central banks are prospecting and exploring how to properly implement a digital currency.
While the pandemic largely paused any efforts by central banks to create a digital currency. It is now providing a greater case for the introduction of these types of assets. The spread of potentially dangerous viruses illuminates a need to reduce the instances in which physical cash changes hands. In a world with more viral transmissions, populations are better protected by using a digital form of payment as opposed to exchanging physical cash.
With the potential for CBDCs growing, only one thing is left to be asked: how many countries will introduce a CBDC?
While China has been singled out as one nation that didn’t embrace the concept of making transactions though Bitcoin, the People’s Bank of China has looked into the possibility of (and had indeed tested it successfully according to reports), the Yuan’s digital counterpart. Called the Digital Currency Electronic Payment (DCEP), this digital currency is recognized by commercial regions such as Shenzhen, Chengdu, and Suzhou. To our contention, the planned wiping out of popular cryptos by China may be a nationalistic tactic to introduce its very own digital currency to be used instead. The country is planning to put digital currency into national circulation prior to the commencement of the 2022 Winter Olympics.
Japan is also set to trial its digital Yen and intends to have a system in palace by the end of 2022.
Of late, numerous CBDC developments have sprung up such as Sweden’s central bank, the Riksbank and Bahamas’ Sand Dollar and Cambodia’s Bakong.
So Why Hasn’t the Entire World Caught on to CBDCs?
While China and Japan are working to build a CBDC, fact of the matter is, banking institutions across the globe are not necessarily into this economic shift.
It is not apparent which entities are dead-set on adopting the technology. Some are even antagonistic about this. Just last month, Tesla owner, high profile businessman and industry innovator, Elon Musk stated that Tesla is dropping its support for Bitcoin by not accepting it as payment for their electric vehicles. Musk explains that the decision was the result of Bitcoin’s mining that comes from non-renewable sources.
Musk’s statement impacted the cryptocurrency market by plunging its value by 40%, with Bitcoin already cut down to size earlier in May.
Analysts and business owners concur that there will always be entities and organizations that would be spearheading efforts ito lobby for more expansive use of cryptocurrencies. One thing that they often see as a hindrance to the complete adoption of cryptos is the general lack of regulatory guidance.
The Varying Nature of CBDCs
The mechanisms put in place by different central banks vary greatly from each other as they completely rely on their own theories and technical know-how. Each is subject to its own economical design and frameworks that try to replicate the flow and structure of central banks. Some approaches are more direct than others; some more limited than others. But it is also apparent that these share commonalities specifically when we look at their internal life cycle.
Another pertinent point to be considered here is the CBDCs’ interoperability with other digital assets. There is a standing question of whether or not CBDCs would be able to operate with other cryptocurrencies and stablecoins to complete payments between different blockchains.
What is Clear
The prospect of releasing CBDCs into the cryptocurrency market is promising in that it opens an avenue for payments that are faster, more efficient, and contact-less. The technology serves to make life easier for the common crypto holder in that it tears down barriers and makes buying and selling more accessible to the masses.
But then, if we are to be smart, we must guard against threats that are endemic to CBDC systems, specifically online breaches. Apart from that, CBCDs are viable economic creations. We encourage nations across the globe to take the next steps to plan, develop, and implement a CBDC in their country.