According to reports, central banks are playing with the idea of switching to digital currencies. This stands as a huge contrast to the whole notion of cryptocurrencies that seek to overthrow traditional forms of money.
How will money be governed in the future? This is the hot topic of debate that has been amplified by Facebook’s Libra project. Main economies around the world have started a quest to find out whether CBDCs (Central Bank Digital Currencies) could replace contemporary and established authority over money.
So, let’s take a look at some of the most asked questions when it comes to the surge of digital currencies and its integration process.
Are cryptocurrencies the same as CBDCs?
The simple answer is no, and here’s the explanation:
Central bank digital currencies are conventional money just in a digital form which are distributed, regulated and controlled by the central bank of a nation. Cryptocurrencies, on the other hand, are generated through maths equations and puzzles and are regulated by separate online bodies and communities as opposed to one centralized financial institution. Examples of cryptocurrencies are Bitcoin, Litecoin, Namecoin and Peercoin.
However, both CBDCs and digital cryptocurrencies do have something in common; they are both founded on blockchain technology. It is this technology that makes the recording and process of transactions possible.
A few retailers take and accept Bitcoin as a payment method, but cryptocurrencies are not classified or approved as legal tender; which paves the way for CBDCs to make their mark as a new modern form of money.
The value of cryptocurrencies depends on the financial markets whereas CBDCs are affected by economic growth, monetary policy, interest and inflation rates, and trade surpluses.
What is electronic cash and where does it fit in?
The way we pay for goods and services is evolving. Contactless debit cards and e-money have made the buying process easier for customers and retailers. However, this is also a contrast to CBDCs.
What is electronic money?
According to Investopedia.com, electronic money ‘refers to money that exists in banking computer systems that may be used to facilitate electronic transactions. Although its value is backed by fiat currency and may, therefore, be exchanged into a physical, tangible form, electronic money is primarily used for electronic transactions due to the sheer convenience of this methodology.’
CBDCs would not just be a substitute for traditional money, as is the situation with electronic cash, but it would completely replace legal tender as it is.
What are the benefits of Central Bank Digital Currencies?
Central banks consider CBDCs the future of payments; as payment systems stand, they often take a lot of time and can be expensive. Digital currencies could offer a more streamlined payment process that could help boost economic growth.
Various central banks have suggested that CBDCs could compete with the surge of cryptocurrencies, especially Facebook’s Libra, with its scheduled launch for the summer.
Although cryptocurrencies, like Bitcoin, are hampered by the unpredictable nature of the financial markets, they pose no real threat to the central banks’ governance of its monetary policy and legal tender. However, central banks and governments around the globe are becoming increasingly concerned that Facebook could dissipate the traditional ways money is governed. Facebook has more than 22 billion monthly active users; this is fueling the fear amongst central banks as they are worried that traditional governance of monetary policy could be stripped away and taken by the social media platform.
CBDCs offer all the benefits of a cryptocurrency, avoiding the volatility of the financial markets while preserving state control over monetary policy.
At a time of negative interest rates, central banks think CBDCs could spur new business investment.
How long until CBDCs are introduced?
Most CBDCs projects are still in production, so it’s still early days. According to the Bank for International Settlements, a growing number of central banks are planning on launching their own digital currencies during this decade.
Among the list of largest economies, the People’s Bank of China is on the verge of becoming the first central bank to launch a CBDC. Details of the project are limited, but reports hint that it could be based on blockchain technology and may be distributed to retail banks and financial organizations.
Other countries are somewhat wary of the new digital currency that could change the world as we know it. The central banks of the UK, Japan, Switzerland, Sweden, and the bloc announced early last week that they will cooperate to compare findings as they investigate both the advantages and disadvantages of introducing CBDCs as a replacement for traditional legal tender.
How do the major central banks feel about the CBDCs?
There is a general sense of uncertainty and reluctance amongst central banks.
The US Federal Reserve has distanced itself from the initiative taken by other major central banks to evaluate the pros and cons of CBDCs.
On November 19th, 2019, Jerome Powell, the US Fed Chairman wrote a letter to the House of Representatives’ French Hill outlining how the US Central Bank is evaluating all the implications of introducing a CBDC, including the consequences it could have on commercial banks, data protection, and the possible increase in cases of cyberattacks.
“In analyzing the potential costs and benefits of general purpose CBDC, we are carefully monitoring the activities of other central banks to identify potential benefits that may be relevant in the U.S. context,” said the Fed Chairman. “To date, our observation is that many of the challenges they hope to address do not apply to the U.S. context including disuse of physical cash, narrow reaching or highly concentrated banking sectors, or, poorly developed payment infrastructure, more generally.”
Sourced from unchainedpodcast.com.
Japan’s central bank warned that all uncertainties surrounding the repercussions CBDCs could have on retail banks and other financial institutions needed to be cleared up. The Bank of Japan also debunked the suggestion that central bank digital currencies could enhance the effects of negative interest rate schemes.