Central Bank Digital Currency (CBDC) are the new hot topic that 90% of surveyed countries are experimenting with in order to minimize the use of crypto trading and fiat currency. The Bank for International Settlements (BIS) acts as a bank for central banks, it’s important to gain an understanding on what the BIS thinks about this new type of currency to forecast the outcome of whether most countries will adopt it. The BIS describes CBDC’s as split in two categories, the first being the retail side of currency where it’s used by individuals to pay for goods and services whether it being to buy groceries from your local supermarket or buying clothes from your favorite stores. The other section would be a wholesale CBDC, implying that this section of currency would be run by financial institutions like banks for financial markets in order to control the flow of money. Because CBDC’s use blockchain technology, there will be an option of two types of retail currencies. The first being token-based retail which is identical to crypto having a private or public key, this method has been fairly secure from attackers. The second being account-based currencies where it will require identification in order to to access an account. The BIS is encouraging countries to amalgamate CBDC’s because from an economical point of view this system seems efficient by cutting out commercial banks and having central banks be fully in control of interest rates. But from a consumer point of view there is a point to be made that this system doesn’t improve privacy like the central bank says it does but minimizes it.
CBDC’s are possible because of the use of blockchain technology cryptocurrencies use, although there is a major dichotomy between the two, cryptocurrencies are decentralized and CBDC’s are centralized. The BIS wants a centralized system so that central banks can stay in control, the problem is they are currently being threatened by cryptocurrencies, stablecoins and big tech companies. The BIS boldly states that cryptocurrency’s can’t be used because of money laundering and energy footprints, meaning it doesn’t comply with Environmental, social, and corporate governance (ESG) terms. Stablecoins attempt to be a credible source by being backed by real currencies, the argument for why they’re not needed according to the BIS is because in simple terms, the backers aren’t trustworthy like the central bank is and there’s no innovation because “stablecoins are ultimately only an appendage to the conventional monetary system”. Big tech is by far the most threatening option for central banks because of the amount of users that they house and the data that’s collected which isn’t shared. The BIS argues that big tech has an advantage when it comes to bringing in users onto their platform and creating their own currency, if many people flock to a specific platform, others will follow. They say that these big tech companies have created a problem with their monopoly of owning the majority of market shares in their specific sector, they’re able to abuse their payment systems by making “fees that are even higher than those charged by credit and debit card companies currently.” BIS sees big tech as a threat and believes that most citizens would pick to trust their government over big tech.
The general public are left to ponder about three main choices of monetary integration, either with governments CBDC’s, big tech or cryptocurrencies. All these payment systems except for crypto are stripping people of their privacy so many individuals are inclined to make crypto currencies like Bitcoin or alt coins the main financial payment system. The problem with this is governments will never integrate cryptocurrency’s like bitcoin because of decentralization and are instead trying to figure out a way to get people to flock to CBDC’s the way big tech does so. The implications that come with CBDC’s will cause a huge economical shift to the current system so it will have to be rolled in slowly. What can be expected is because the central bank has control over how much CBDC they can allocate, they will start small and slowly get rid of the supply of fiat and possibly limit the purchase of cryptocurrencies. Once the CBDC system is fully established, the government will be able to control supply and demand to a greater extent by limiting the amount each person can purchase and when they can purchase, this will decrease the likelihood of long term inflation and fiat capitulations. There is a big debate on whether long term monetary outlook for nations are more important than the privacy and security of the individual, the question is how will people react to CBDC’s once they are integrated for the first time in developed countries.
Sources
https://www.bis.org/publ/arpdf/ar2021e3.htm
https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp
https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2713~91ddff9e7c.en.pdf
