Could Central Bank Digital Currencies Soon Become a Reality?

At the beginning when bitcoin emerged as a digital currency, it didn’t seem to be a big deal, very few banks or central bank show interest if any, rather it faced opposition from all traditional (fiat) financial systems. A decade later, when cryptocurrency has become popular and is nearly dominating over major world currencies such as the dollar, euro, Japanese yen among other, central banks are gradually starting to rethink over if they need to prevent cryptocurrency from seizing veto power of controlling the money supply. In this article we focus on the possibility of creating central bank digital currencies (CBDCs) as a cryptocurrency alternative.

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Everything seemed calm until when Facebook reveal their intention of launching a global coin in the name of Libra in mid-2019. The Libra has awakened major parties in control of digital currency to debate over the impact that Libra could possibly have over the traditional currency.  Some of the key area of concern of the new central bank digital currencies into mainstream include:

  1. The difference between CBDCs and cryptocurrency

Many individuals are yet to know whether the CBDCs are same as the cryptocurrency, certainly, they are not the same. CBDCs are traditional money converted into digital form, then issued by governed by a central body. Conversely, cryptocurrency such as bitcoin is created by solving a complex mathematical equation has no central authority to oversee their activity.  

However, blockchain still remains the common denominator that both CBDCs and cryptocurrency share. It’s a ledger that records and stores where the transaction data making it possible for multiples parties to publicly access the data at rea-time. 

Despite wide acceptance of bitcoin and other altcoins as a form of payment, they are yet to be declared as a legal tender however, CBDCs will be recognized as legal money. The value of cryptocurrency is entirely determined by the market while the value of the digital currency will be influence with factors similar to those that affect fiat such as trade surplus and monetary policy just to mention a few.

Does CBDCs differ from electronic cash?

Electronic cash is a form of contactless money mainly done using a debit card, master card, visa card among others. The e-money has gained popularity among consumers and business in paying for food goods and services without the need to carry hard-money. However, this also differs from CBDCs in various ways.

For instance, electronic cash is a store of value held at pre-paid cards, banks or digital wallets such as PayPal intended to make payment to purchases made. On the other hand, CBDCs will merely represent physical money replaces notes and coins.

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Benefits that come with CBDCs Adoption

The advantages of creating CBDCs are all centred towards central banks and its associates especially the governments of various country. The central bank believes CBDCs will create a payment system that will be time-consuming, costly and less efficient, this will reduce money transfer and prolong settlement time leading to stoking economic growth.

Probably the main advantage the CBDCs is the ability to country cryptocurrencies from dominating once private project such as Libra kick offer. Despite, the virtual currency faces limitation such as volatility that hinder their dominance over the central bank whose currency value is stable. The emergency of a Libra project that has promised to be backed up with major world currency has potentially eroded sovereignty of monetary policy.

In an era of hard economic times leading to negative interest rates, CBDCs will serve as a tool to redeem individual entrepreneurs and businesses to spend and invest money. The central bank will use digital money to impose taxation that is not possible to do on other decentralized cryptocurrencies.

How close are CBDCs from becoming a reality?

There seem to be many efforts to make CBDCs a reality as soon as possible. However, most of this project is at a preliminary stage for most countries. A growing number of central banks are in a rush to issue their own digital currencies a few years to come before cryptocurrencies takeover.   

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For instance, the Bank for International Settlements (BIS), has discovered that most of the scheme being piloted is mainly for emerging markets. Among the countries with large economies, China likely to be the first to launch CBDCs. Some of its projects such as digital renminbi powered by blockchain technology are at completion stage. The digital renminbi is backed up with a central bank of China and other financial institutions.

As a result, central banks of countries including as Britain, Japan, Switzerland and Sweden are looking forward to inviting the group currently working by BIS, to share an idea of issuing a common CBDCs in their region. It’s true the issue of CBDCs will not happen overnight but there is an effort to make it a reality in the shortest time possible. The acceleration effort is being put to ensure that CBCDs are produced before as a way to neutralize the dominance of cryptocurrency that is a possible threat to central banks.

Does CBDCs have the support of Major central banks?

Up to this moment, there is no clear support or opposition from a particular central bank, caution is being taken to avoid future blames. At the moment consultative efforts are being made before taking sides. For instance, the U.S. Federal Reserve failed to attend a collaboration initiated by the European and Japanese to discuss the CBDCs issue because it had not reached a consensus agreement of its own.

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Jerome Powell, the current Federal Reserve chair, said in November the bank was concerned with digital currency debate before even considering other key factors such as regulatory, stability and operational questions. 

Others, including the Bank of Japan, have cautioned the uncertainties that may come along with the CBDCs and appealed to a commercial bank to scrutinize the issues. The BOJ has noticeably given the two side of the coin on how CBDCs could boost interest rates and at same time propagate some negative monetary policies.

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