As the world advances towards the digital age, the financial system is also undergoing transformation. Digital currencies – particularly cryptocurrencies like bitcoin and ether – are exerting significant pressure on the traditional financial system, prompting institutions and governments to reconsider the meaning of money in the 21st century. This dynamically changing environment has given birth to the concept of CBDC (Central Bank Digital Currency).
CBDC is not just another digital currency. While most cryptocurrencies are decentralized and driven by market forces, CBDCs are digital currencies issued and controlled by central banks. In recent years, central banks have increasingly recognized the importance of digital currencies and their potential. In a previous article we mentioned that in China, over a million dollars worth of yuan is being distributed among residents of Shenzhen, although the state is not giving cash to its citizens – it’s providing CBDCs.
This article provides insight into what CBDC really is, the benefits and risks associated with its implementation, and how it might reshape global finance.
What is Central Bank Digital Currency?
Central Bank Digital Currency, or better knowns as CBDC is a digital currency issued and controlled by central banks, which the state recognizes as official currency. This differentiates it from cryptocurrencies, as cryptos generally don’t have this status and often face regulatory challenges.
Most cryptocurrencies operate in a decentralized manner, using blockchain technology for transaction record-keeping. In contrast, CBDCs are centrally controlled and their issuance is managed by central banks. This enables the regulation of the quantity and value of money in a stable and predictable way. Furthermore, CBDCs are designed to integrate into the current financial system, whereas cryptocurrencies often emerge as alternatives to traditional financial systems. As a result, CBDCs can be easily exchanged for traditional fiat currencies and pose much less risk against unforeseen market fluctuations.
In addition, CBDCs can potentially revolutionize international money transfers. The current system is often complicated, expensive, and slow. However, a unified or interoperable CBDC system might enable instant international transactions with minimal costs.
How do CBDCs differ from cash?
Due to their digital nature, CBDCs possess several features that are not applicable with cash or traditional fiat money. These properties can be particularly advantageous for managing government subsidies, aids, or other specific-purpose payouts.
CBDCs provide the opportunity to restrict the use of money to a certain timeframe. If a state, for example, decides to distribute CBDC among its citizens but restricts its usability to one month, it can potentially stimulate the economy by urging people to spend their money within that timeframe.
Payments can also be tied to specific products or services. For instance, a health subsidy could only be used for purchasing medication or medical services.
CBDCs enable instant payments and transactions, minimizing delays or costs associated with traditional bank transfers. They also provide access to financial transactions for those excluded from the traditional banking system. Furthermore, CBDC transactions are easily traceable and verifiable, reducing the chances of fraud and malpractices. This, however, has its downside, especially if a state decides to utilize this feature for surveillance over its own citizens.
Potential dangers of CBDCs
Since CBDCs are entirely digital, they are susceptible to cyberattacks, especially if attackers attempt to compromise the underlying blockchain network.
It’s also important to remember that if the design and implementation of the CBDC is not well thought out and regulated, it could lead to financial issues and economic hardships.
Finally, in the wrong hands, CBDCs could easily become tools for total control, as previously mentioned. If linked with people’s identities, it would facilitate governments in monitoring and controlling financial transactions. This potentially means that the state can have information about every transaction made. If the state deems someone a threat to society (based on their political views or social media statements, for example), they might even freeze the individual’s account. This concern is not unfounded; take China’s case where the digital yuan has already been linked to a social credit system.
CBDC projects around the world
The proliferation of digital currencies and the explosive growth of technological innovations have spurred central banks worldwide to seriously contemplate the implementation of CBDCs. Different stages of development can be observed in various countries.
11 countries – including Nigeria, the Bahamas, and Jamaica – have already launched their own CBDC, although not all have been unequivocally successful. Only 0.5% of Nigeria’s population uses the eNaira, which was introduced two years ago. Since then, the Nigerian central bank has capped daily ATM cash withdrawals at 45 dollars to promote electronic payments. However, the Bahamas’ “Sand Dollar” is actively used by citizens.
Certain countries, such as China and Sweden, have taken steps toward the introduction of CBDC. China, for instance, initiated pilot programs in various cities testing the digital yuan (e-CNY), while Sweden is considering the potential introduction of the e-krona.
Many countries, including the United States, Canada, the United Kingdom, and countries of the European Union (including Hungary), are in the research and development phase. Consultations are underway in these countries to better understand the advantages, risks, and potential impacts of CBDCs.
CBDC and global finance
As CBDCs continue to gain traction, their introduction may very well reshape global finance. The convenience, security, and efficiency benefits that they promise could revolutionize the way we make transactions and conduct international trade.
On the downside, they can also exacerbate issues related to financial inclusion. If not properly managed, the transition from traditional banking systems to CBDC might exclude vulnerable populations, like the elderly or those without access to modern technological devices.
Additionally, with the power to control and surveil transactions, governments might abuse this authority, leading to an erosion of privacy. Such concerns need to be meticulously addressed before CBDCs become widely adopted.
Conclusion
As the world steadily progresses toward a digital future, financial systems need to keep up with the evolving landscape. CBDCs represent an innovative step in that direction. However, their introduction comes with benefits and challenges, and how they shape the global economy will largely depend on the policies that guide their implementation.
Time will tell whether CBDCs represent the currency of the future or merely a tool for digital dictatorship.
(Cover photo: Depositphotos)
