Central Bank Digital Currencies could take over sooner than you think 

14 June 2021

What are CBDCs?

CBDCs are essentially the digital version of cash. Instead of printing money, a country's central bank issues electronic coins backed by the government. Citizens could trade-in cash for the digital currency of the same value.

Each digital currency tracks a fiat currency. For example, an e-dollar like Tether tracks the US dollar. In many ways, digital currencies function identically to cash currencies but with some additional utility.  

CBDCs would greatly benefit citizens for numerous reasons.

First, they significantly reduce the time and money it costs to transfer cash between two parties, especially large sums of money.

Second, you're not limited to moving money within national borders either - you can send money anywhere on earth with little cost.

Third, citizens in poorer countries without access to bank accounts can get safer access to cash through a phone or computer. They would no longer need a card or a physical bank to access capital.

Lastly, CBDCs would also provide heaps of valuable data on consumer spending habits and help prevent financial crime like tax evasion and money laundering by increasing transparency in the banking system. 

Which countries are investigating CBDCs?

A study from the Bank for International Settlements indicated that 80% of central banks are researching CBDCs. Many countries are already in the development or testing phases.

Toward the end of May 2021, the Bank of Ghana governor reported that a Ghanain CBDC is "quite advanced" and nearly ready to enter the pilot phase. Ghana isn't the only African country exploring CBDCs - South Africa, Morocco, and Egypt are also investigating the technology.

The Bank of England has teamed up with the Treasury to launch a task force to research using a CBDC in the UK. In a statement earlier this year, the Bank of England reported the digital currency would co-exist with cash and wouldn’t replace it. The media has jokingly referred to the British CBDC as 'Britcoin'.

Just last week, the Bank of Thailand hired a German technology company called Giesecke+Devrient to help develop a CBDC. Twenty percent of people in Thailand still don't have access to a bank account, and a national digital currency could help close the gap. 

Are some countries already trialling CBDCs?

China and Sweden are leading the world in CBDC development so far.

The Swedish Riksbank started developing the e-krona in 2017, following analysis showing its citizen's declining use of cash. In 2020, the Riksbank began the e-krona pilot phase to test the digital currency's technical elements. The countries top banker, Stefan Ingves, recently said he believes the government could finish development and issue its CBDC by 2026.

Despite Sweden's substantial progress, China is still leading the race to be the first country to issue a CNBC. The Chinese government has been hard at work since 2014 creating its national digital currency, called the digital yuan. Some have indicated that China was in a prime position for a digital currency as its economy was nearly cashless already.

The People's Bank of China has already trialled its digital currency in Shenzen, Chengdu, and Suzhou, which involved the government giving out digital yuan through a lottery system.   When the digital yuan eventually goes live, the government will distribute the currency to commercial banks, instructed to let citizens exchange their paper cash and coins for the digital equivalent.

It's not yet clear how citizens will store their digital currency, but there will likely be a QR code-based system that functions similarly to WeChat or Alipay. Additionally, smartphone manufacturers could develop integrated digital wallets for Chinese smartphones.

There are some possible downsides to CBDCs. 

Citizens could potentially withdraw masses of money from banks during a crisis, which would trigger a run on the banks where nobody can prevent mass withdrawals.

However, the biggest concern critics have of CBDCs relates to government intervention. If a central bank or government has complete control over a hundred percent of the country's digital money, it could ban citizens from buying anything it disapproves of. For example, books or newspapers that discuss ideas the party in power doesn't agree with.

Fine-tuning regulation to prevent these outcomes could take decades, if not more. 

Are countries considering using digital currencies that aren't government-backed?

Some countries may opt for decentralised digital currencies like Bitcoin instead of developing CBDCs. Instead of having a central controller or authority like a central bank, Bitcoin and other cryptocurrencies rely on blockchain technology to confirm transactions. This puts the power in the hands of users rather than a bank or government. For this reason, it's not likely any developed or powerful country will encourage its citizens to use a currency other than the one its central bank maintains.

However, El Salvador's president this week announced that Bitcoin will be legal tender in the country, alongside the US Dollar. President Nayib Bukele is the first national leader to support any decentralised cryptocurrency publicly. This is a massive opportunity to test cryptocurrencies on a national scale. Moreover, should Bitcoin be successful in El Salvador, other small or developing nations could adopt some form of digital currency (albeit not necessarily a decentralised one like Bitcoin).

While it's unlikely that most developed nations will follow El Salvador's course to make Bitcoin the national currency, many countries could use CBDCs in the not-so-distant future.    

Register for the prototype

The next step on our roadmap is to ask for your help. We want to hear from you what works and what does not, which features are more important to you and which ones are lacking. In short, we need your guidance.

To facilitate this, we are creating a beta of our platform and are looking for a thousand pioneers to put it through its paces. We will expect a lot of feedback and suggestions from these pioneers over the next two to three months. However, these pioneers are not volunteers, when we launch each pioneer will have bestowed upon them 10,000 edifyqs.

If you see yourself as a pioneer, register for the prototype and explore the future.

Thank you! Your message has been sent.
Unable to send your message. Please fix errors then try again.