How to structure CBDCs, and what effect they will have on markets are two topics hotly debated in recent months. This past week demonstrated this as various opinions were shared on each, along with a potential CBDC wave in Central America.
Hashrate Backed CBDC
When a nation wants to offer a CBDC, but its FIAT suffers from issues such as hyperinflation, what are its options? Roxe, a company which ‘helps central banks launch, manage, issue, send and receive CBDCs’, is hoping to leverage the Bitcoin networks hashrate.
By having a CBDC backed by hashrate, developing nations which have already adopted foreign FIAT as legal tender are being given the opportunity to benefit from a currency that is not only stable, but resistant to government manipulation. In an effort to aid in the development of this endeavor, Roxe recently hired Andreas Jobst – an economist formerly of the IMF. This hiring builds upon past move of a similar nature, which saw Roxe bring in talent from companies like Bakkt, MoneyGram, and Venmo as well.
Roxe CBO, Josh Li, states, “Much like standardized units allow energy to be publicly traded, we are standardizing the Bitcoin hashrate. Backing fiat currencies or CBDCs with Bitcoin hashrate is a more efficient and reliable way to help develop a country’s economy, facilitate cross-border remittances and payments for its citizens, and improve the international distribution of its currency.”
While time will tell if this approach is sound, it is certainly unique. If successful, Roxe could potentially play a role in shaping the future development of what is sure to be a very large pool of CBDCs.
Negative Interest
When you deposit funds in to a savings account, it is reasonable to expect some kind of return – however modest it may be. What happens though when a nation succumbs to a deep financial depression, and the powers-that-be want to stimulate the economy? Over the years, there have been multiple examples of ‘negative interest rates’ being used as the answer.
This means that rather than receiving a yield on your funds held by a bank, you must pay the bank instead for that ‘privilege’. Essentially, the norm is flipped, with borrowers receiving a yield, and lenders paying.
In a recent look at the potential effects which CBDCs may have on world economies, the Wall Street Journal paints a picture in which these assets provide governments with even more leverage/power over interest rates.
In the past, people would simply self-custody cash in an effort to avoid paying a bank to safeguard funds. In a future where CBDCs are commonplace, replacing physical cash, this becomes impossible. The loss of this ability is what may potentially give governments the aforementioned increase in leverage/power.
One of the major fears behind the development of CBDCs is the increased oversight they will afford governments. Every transaction will be traceable, potentially providing governments with a plethora of data to track and assess consumer habits. Increased leverage over interest rates is yet another fear to be added to a growing list.
Central America
El Salvador made history when it decided to accept BTC as legal tender within its borders. Now, several of its neighbouring nations have seen the merits of digital assets and have decided to mull over utilizing them as well. Rather than adopting BTC however, Guatemala and Honduras are each considering the launch of a CBDC.
Each country has indicated that their central banks have been given the approval to launch a study on the merits of a CBDC. Guatemala has gone as far as stating that if it opts for a launch, its CBDC would be known as the ‘iQuetzal’.