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The Future of Central Bank Digital Currencies - Institute for Emerging Technologies & Social Impact

The Future of Central Bank Digital Currencies

The media cannot get enough of crypto. What started as a subject discussed in niche technology and finance outlets has become a global phenomenon, with crypto-related topics trending on social media and dominating the front page of prominent international outlets such as Financial Times, New York Times, Al Jazeera, and countless others.

As we continue to focus on the development and news surrounding crypto, trying to keep up to speed with the fluctuating market, it is clear we are living in the crypto age. As a result, the public is becoming more aware of the technology behind crypto – blockchain.

From monitoring global supply chains to being used in national elections, the possibilities of blockchain are endless. The latest trend surrounding blockchain is Central Bank Digital Currency (CBDC).

At its core, CBDC is the digital form of a country’s fiat currency. Issued by a country’s monetary authority, such as the central bank, CBDC provides an electronic record of the country’s currency via blockchain technology.

Seems a lot like crypto, right?

While the concept and technology behind CBDC are the same, there are two key differences.

First and foremost, while cryptocurrencies are owned and operated in the private sector, CBDCs are issued, regulated, and controlled by the national government.

Reed Landberg, a UK economy leader for Bloomberg News, notes that CBDC is unlike deposits in banks or other private forms of money. He states, “CBDC would carry the explicit backing of the government. It would be designed to work with online payment platforms and to evolve along with technology.”

Since CBDCs are operated and monitored by the government, they will use their own private blockchain, rather than a decentralized blockchain. This is the second key distinction between the two.

While CBDCs are innovative, taking advantage of emerging tech and operating with digital payment platforms, why would individuals use it over existing private money methods we are accustomed to, such as bank deposits, credit cards, and online payment apps? Are not all forms of money interchangeable?

Although most of us believe the latter is true, this is only due to our trust in private institutions. As consumers, we trust that private institutions, such as our banks, will convert our private money, like credit cards and electronic payments, into central bank money.

Fabio Panetta, a member of the executive board of the European Central Bank, explains our faith in these institutions, and the interchangeability of money, is due in part to a) safeguards, like federal banking regulations, and b) our use of central bank money as an undisputed “monetary anchor” so we do not have to individually evaluate the value of private money.

However, with CBDCs, we could rely less on private institutions. This will mitigate the risk of bank runs or defaults, preventing financial crises such as the disastrous 2007-2009 Financial Crisis.

With cash payments steadily decreasing globally, CBDCs would ensure that private money does not exist without a central bank currency to act as an anchor. As Panetta summarizes, “CBDCs aim to ensure that public money remains widely accessible and usable for daily transactions.”

Beyond assuring access to a country’s fiat currency, CBDCs offer a fast low-cost payment system to developed and developing regions. Moreover, government and monetary institutions can implement monetary policy more effectively, especially in times of financial crisis.

Governments around the world are researching the implications of utilising CBDCs in their economies. While the UK, EU, and US are still developing their own CBDCs, other governments are implementing or already have their own CBDCs.

Earlier this month, the Bank of Jamacia announced they will introduce their own CBDC to the Jamaican economy. Following an 8-month pilot programme, which commenced at the end of 2021, the Bank of Jamacia will issue 230 million Jamaican dollars in CBDC (1.1 million GBP or 1.5 million USD) by the end of March.

Jamaica will be the second country in the Caribbean to have a functioning CBDC, following The Bahamas – which was the first country in the world to launch a CBDC. Issued in October 2020 by the Central Bank of The Bahamas, The Sand Dollar is fully functional for wholesale and retail applications within The Bahamas.

Despite these revolutionary programmes, individuals and governments are concerned about the level of government control CBDCs grant. In regimes such as China, where citizens are already under close surveillance and censorship and the long arm of the state already extends far beyond what is deemed acceptable, CBDCs would give the CCP power to monitor and block payments that it believes do not align with the party.

Additionally, CBDC sceptics are concerned about the effect they will have on traditional retail banks, which basic model has always been based on managing and converting private money and cash. They argue that with CBDCs, banks will lose a considerable proportion of their business, which can potentially harm the industry, costing thousands of jobs and impacting global stock markets as bank stocks drop in value.

Separately, sceptics question whether CBDCs are financially inclusive for communities without internet access.

The future of CBDCs depends on governments’ ability to adapt to and conquer these challenges. As expressed by Jon Conliffe, the Deputy Governor of the Bank of England, “cash is going to disappear, and the question is going to be what role can a CBDC play.” Only time will tell…

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