Paper money is gradually becoming more and more obsolete. Fewer people are using paper currency out of COVID-19-related safety concerns, electronic forms of payments are becoming more commonplace, and cryptocurrencies are on the rise. One of the more recent developments is the idea of central bank digital currencies (CBDCs), which are considered to be a more efficient form of technologically driven legal tender. Given that CBDCs are still in the early stages of development, there is still relatively little information known about how successful it can or will be. But for now, here is a guide on everything there is to know about CBDCs.
Let’s start with a basic overview of CBDCs. Central bank digital currencies are digital-only, state-backed currencies that are managed by a central bank. CBDCs exist on a virtual network and never actually take physical form – they are simply deposited and exchanged digitally. While this may sound similar to existing forms of currency, there are distinct differences:
- CBDCs versus electronic currencies – unlike funds in your bank account, you can never withdraw CBDCs in the form of physical cash; everything happens over a virtual network
- CBDCs versus cryptocurrencies – unlike cryptocurrencies that are not managed by a central organization, CBDCs are managed by central banks
So what purpose do CBDCs actually serve? Ultimately, the rise of electronic and cryptocurrencies that are not linked to governments makes is such that the financial markets in many countries are becoming harder to regulate and monetary policy has becoming harder to execute. CBDCs would theoretically provide greater structure.
LEADERS IN CBDC DEVELOPMENT
To date, the Bahamas is the only location to have rolled out a central bank digital currency. However, many CBDCs are in development around the world:
- China – currently testing the digital Yuan on 500,000 consumers in 11 regions; also developing a transnational currency platform in conjunction with Thailand and the UAE
- Sweden – currently running a pilot program
- India, Pakistan, Thailand – active plans to begin CBDCs
There are also a number of other countries, including the United States, United Kingdom, Japan, South Korea, Switzerland and more that are conducting research and feasibility studies to see if CBDCs could function successfully.
CONCERNS FROM WESTERN COUNTRIES
There is a good deal of concern that has been presented against developing central bank digital currencies, and these concerns have largely come from Western policymakers. The most significant concern is that CBDCs could become too powerful and ultimately destabilize the monetary system. Among other concerns, policymakers worry about data and privacy issues, liability and oversight, and more. Perhaps an even bigger issue is that CBDCs intertwine with politics and would need to pass through all stages of political approval in order to actually be put into practice in many countries.
LOOKING INTO THE FUTURE
As we look into the future and consider how central bank digital currencies could fit into the picture, many people argue that we must look to the past as precedent. Paper money used to be the “new frontier” when metal was used as currency. Now, as paper money is becoming obsolete, technology looks to be the “new frontier.” There is no way to know for sure about the future of CBDCs, but it is clear that times are changing.