In the first week of November 2021, The Bank of England and the UK Finance Ministry announced plans for a «formal consultation» into the creation of a central bank digital currency or CBDC. If the consultation is successful, Britons can expect the creation of a blockchain-based digital currency that will serve as legal tender by the end of the decade.
The UK’s CBDC promises to ease financial transactions and bring individuals without access to banking services into the larger economy. Despite this, the UK is a relative late-comer to the CBDC ecosystem. Indeed, numerous comparable projects are already underway, mostly in emerging economies. Then there are the most notable (and controversial) CBDCs like China’s digital yuan, which is earmarked for incredibly ambitious purposes.
Make no mistake: central bank digital currencies are coming to most countries in the world before the end of the decade, as their unique benefits, speed of use, cost-effectiveness and compatibility with an increasingly digital global economy leave nations with no real choice in the matter.
This article will provide a primer on CBDCs, specifically:
- An overview of CBDC – including their uses and technology
- An analysis of their potential impact
- Finally, a survey of the largest, most notable CBDC projects
The UK’s CBDC announcement was one of several CBDC news stories to appear in the news cycle this November. A competition held by the Monetary Authority of Singapore (MAS) awarded the German corporation Giesecke+Devrient and CBDCgo 50,000 dollars each for developing technologies that support CBDCs in the Nation State. Similarly, these government-backed assets are seeing an influx of institutional involvement in an attempt to improve the larger ecosystem. Indeed, institutions including the World Bank and International Monetary Fund (IMF) are pursuing the issue.
What are Central Bank Digital Currencies (CBDC)?
In the simplest terms, a CBDC is a virtual form of a country’s paper (coin) currency. While most proposed CBDC projects leverage blockchain technology in implementation, CBDC are different from cryptocurrencies like Bitcoin and Ethereum. Unlike cryptocurrencies – which are typically created and regulated by private individuals or organizations – CBDCs are created by a particular country’s monetary authority eg. the US Federal Reserve.
This is because CBDCs are created alongside a country’s printed/stamped fiat currency, and are therefore 100% equal in value to the currency they are tied to – be it Dollars, Kroner, Rupee, or Peso – and thus legal tender.
Presently, no CBDCs are in formal use, but their proposed adoption could bring several advantages and disadvantages.
Proposed Benefits of CBDCs
- May simplify transactions between enterprises and individuals similar to online banking.
- May make it easier to implement monetary policy (e.g. collecting taxes)
- May democratize banking services in emerging countries. For example, in cash-based rural economies, some citizens lack access to banking services. The use of CBDC may remedy this issue (when paired with smartphones)
- May remove the risks and cost associated with using middle-men. As CBDC enables banking without the banks, this may avoid problems like the 2008 Financial Crisis or runs on banks
- The use of CBDC could reduce individual freedoms. It will be much harder to make discreet individual-to-individual transactions or preserve privacy.
- Some analysts argue that using CBDC fails to address financial centralization problems
- CBDCs can be used for nefarious purposes such as punishing citizens for undesirable behavior by freezing their funds or blocking access to online retail services.