Central Bank digital currencies may soon become a reality

The launch of Facebook’s Libra has pushed many Central banks to speed up the development and introduction of CBDC. From that moment on, the new race for the first place in the global financial arena began.

Innovative changes are already coming

The first ever digital currency was launched in 2009 and is called Bitcoin. Since its introduction, more than 6,000 different alternative coins similar to Bitcoin have been created. Back in 2020, Central banks in various regions are now considering issuing their own virtual currencies. In 2015, Tunisia became the first country in the world to issue a blockchain-based national currency called eDinar, also known as Digicash or BitDinar.

At the recent world economic forum 2020 in Davos, the possibility of a Central Bank digital currency (CBDC) was actively discussed. In addition, the creation of the world’s first digital banking consortium was announced in Davos. The initiative, called The global digital currency management consortium, is being launched to bring together major financial institutions, leading multinational companies, government representatives, academics, and members of the world economic forum for a possible CBDC launch.

The world economic forum also released the CBDC Policy ‐ Maker Toolkit, a 28-page guide to the regulatory framework designed to give Central banks a form to assess whether they need to develop virtual assets to benefit their economy. After Facebook tried to launch the Libra stablecoin last year, various Central banks accelerated the process of issuing their own virtual asset. A survey conducted by the Bank for international settlements showed that about 1.6 billion people could get access to CBDC in the next three years. However, cryptocurrencies and CBDC are not the same thing.

How CBDC differs from cryptocurrencies

Digital currency is a broader term under which both cryptocurrencies and CBDC are classified. CBDC is a digital form of traditional money that is developed and regulated by Central banks. While cryptocurrencies, on the other hand, are regulated by online communities rather than a centralized authority. However, both operate using similar technologies, such as a blockchain registry system that tracks all transactions and is linked via a peer – to-peer network.

Once launched, CBDC will be accepted as legal tender throughout the region, but this is unlikely to apply to cryptocurrencies. Although companies will be required to accept CBDC as legal tender, they still have the choice of accepting or rejecting cryptocurrency as a form of payment.

Crypto assets are very volatile in nature. Over the years, the market has seen its value fall or increase by 10-20 percent in a short period of time. This is not the case for cbdcs, as they are just a digital version of existing Fiats. The value of CBDC is determined by factors such as monetary and fiscal policy and the trade surplus, while the value of cryptocurrencies is completely determined by the market.

It is also important to note that there is a difference between CBDC and e-money.

Central banks are ahead of indicators

Central banks are ahead of indicators
Central banks are ahead of indicators

The people’s Bank of China started research on digital currency in 2014. The project was called DC / EP: Digital Currency / Electronic Payments. Recent news in the media broadcast that China may launch it in 2021.

China has also conducted the first real-world pilot testing of its digital currency in some cities. Its promotion also accelerated after Facebook announced plans to launch its own stablecoin called Libra. Against this background, there is no doubt that China wants to become the first country to launch CBDC and establish itself as a leader in the digital economy.

Once connected to the Internet, the digital yuan will work as a replacement for the paper version. Since it will not be a completely new currency, it is expected to be stable and less volatile, unlike cryptocurrencies such as Bitcoin. The currency will also be controlled by the Central Bank, so it will not be anonymous. The Chinese government also recently passed new laws regarding online encryption as part of its plan to launch DC / EP.

To counter China, Japan may also launch its own digital yen in the next two to three years. Kozo Yamamoto, head of the Commission for research on banking and financial systems of the liberal democratic party of Japan, recently unveiled a plan to launch a digital version of the yen.

Countries such as France and Canada are thinking quite seriously about their release in the near future. The Bank of England recently published a discussion paper on the possibility of issuing a digital pound. However, the Central Bank acknowledged that the electronic pound could destabilize its commercial banking system.

The Central Bank of Bahrain also conducted a study on the possibility of implementing the digital currency of the Bahraini Dinar. In the future, we may see that the Gulf countries will issue joint virtual money, but there are no such plans yet. Similarly, the European Union (EU) may also intend to do so in the near future. The interesting thing is that technically Venezuela already has its own cryptocurrency – Petro.

Digital currency and its legality

In March, South Korea’s National Assembly passed a new law that will provide a framework for regulation and legislation regarding cryptocurrencies and crypto exchanges in the country. However, cryptocurrencies are still banned in major emerging markets around the world. China, which is in the process of withdrawing its own digital currency online, has warned its citizens about the risks associated with Bitcoin, since It does not have the same legal status as Fiat funds.

Japan, too, just recently passed the payment services act (PSA), which allows a number of cryptocurrencies and exchanges to be used for payments and trading purposes. In India, the Central Bank has banned banks and financial institutions from trading crypto assets. The country’s Supreme court recently intervened and asked the Central Bank to change its position. There are no laws regulating the crypto space in England, however, the Governor of the Bank of England has reportedly stated that crypto regulation is necessary.

Countries that have moved forward and declared cryptocurrencies illegal include Algeria, Ecuador, Bangladesh, Macedonia, Nepal, and Bolivia. However, this is legal in countries such as the Philippines, Indonesia, Malaysia, Thailand, Vietnam, Switzerland, the United Kingdom, Australia, Ireland, Spain, Portugal, and Denmark.

Obviously, while many jurisdictions have not been open to the idea of a crypto space, the situation is changing rapidly. 11 years have passed since the launch of Bitcoin, and now many financial regulators are considering launching their own digital currencies. New laws are being developed to introduce this innovation into the financial system, be it cryptocurrencies or CBDC. By the end of this decade, CBDC could change the global currency landscape and the way we work with money. In the future, we may see other emerging economies follow South Korea and fully legalize crypto and its exchanges. We can also see a scenario in which CBDCS compete with cryptocurrencies in the market.

The desire of Central banks

Although cryptocurrencies have been around for more than a decade, why are Central banks pushing for a digital currency now?

Could this be related to Facebook’s decision to launch its Libra stable coin? Many experts, who for years has studied cryptocurrencies, I think that the Scales are changing the rules of the game. Since it is a stablecoin, it is less volatile because it will be tied to a basket of Fiat and government securities. If Facebook decides to add Libra to all its products, it will attract a billion people to the crypto ecosystem, thereby establishing global dominance.

Experts also believe that Libra will significantly increase the speed and penetration of cryptocurrencies around the world, both for itself and for other coins such as PTS. If regulators approve it, sending money through it will be as easy as sending a text message or photo. For a Tajik immigrant working in Russia, sending money to his family back home would be as trivial as sending a text message to a friend.

Part of the Central Bank’s decision to launch a CBDC may be due to Facebook’s opposition, which they see as a threat. However, whether Libra will get the approval of US regulators is a different matter, as many us congressmen fear that legalizing Libra could end the dollar’s global dominance.

End of paper money

End of paper money
End of paper money

As developing countries push for digitalization, the introduction of CBDC can significantly speed up this process. On the other hand, managing cash is also an expensive and complex task for Central banks. The introduction of a CBDC can reduce the costs associated with providing a national source of income. There are no production and storage costs. In short, it can be a cost-free medium of exchange.

This will also help economies become cashless, which in turn will increase transparency and contribute to greater macroeconomic stability. In addition, experts believe that CBDCS will help developing countries improve their financial accessibility. With the introduction of CBDC, they can transfer the non-banking sector to the financial system.

After the FINTECH revolution that changed the global financial landscape itself, the payment landscape in many emerging economies has become narrowly concentrated. Many Central banks believe that the growing concentration of the payment system in the hands of several companies can cause problems. In such cases, the introduction of a regulated Federal digital currency will help keep the market under control. In addition, CBDC is expected to increase the stability of the payment system.

Experts also argue that CBDCS can strengthen the economy’s response to changes in the discount rate. Some believe that the Central Bank may even charge negative interest rates during an economic crisis, thereby destroying the zero bottom position.

According to the IMF, the introduction of CBDC will contribute to faster and safer settlement of international financial transactions.

Problems for CBDC

While many see the introduction of the CBDC as a game-changer, the Central Bank must also overcome various challenges in order to introduce IT to the economy. For the smooth operation of the CBDC, the Central Bank must ensure that the PROPER Foundation is laid when it comes to infrastructure. Power outages and interruptions to the Internet may interfere with its operation. In this way, they must ensure that a coherent ecosystem is created in which the country’s citizens have access to the Internet, even in rural or geologically complex areas.

Although CBDCS may not incur production or storage costs compared to Fiat, they may require additional monitoring and supervision, which increases the cost.

Another problem that CBDCS will face is geographical restrictions. Although paper funds are exchanged in other countries, they may or may not accept the digital version. Thus, CBDCS may be limited by territorial boundaries of origin.

They will also affect the banking system. Banks will lose their deposits, which may negatively affect the economic growth of the countries concerned.

The problem that Central banks must solve is the scalability of technologies such as blockchain. Despite the fact that blockchain is the technology of the future, will it be able to process the same number of transactions as Visa? In a power like China, millions of financial transactions are made during the day: can the blockchain take on the load? In addition, many will argue that they will lose financial privacy, since every transaction performed using this asset will be recorded and available for review by the authorities.

There is no doubt that digital currencies will dominate in the future, and cash transactions will be marginalized. However, Central banks must ensure that digital currencies have the right infrastructure and they implement the right technologies, tracking innovation, and investing in research and development.