Even before this year’s crypto winter where investors have lost more than $2 trillion, leading up to the dramatic FTX collapse that played out in real time across crypto-Twitter timelines, crypto’s drive towards more regulation was already rising.
One of the best indications of a trend towards more regulated forms of digital currency is the increase in the last couple of years of Central Bank Digital Currencies (CBDCs). CBDCs are virtual currencies issued by a country’s central bank. More than 105 countries (95% of global GDP) are in some stage of either researching, developing, piloting, or launching a CBDC. 10 countries have already launched a virtual currency, including China, Jamaica, Nigeria, and several countries in the Eastern Caribbean. China plans to expand its pilot launch in 2023.
While the United States has not decided to develop a CBDC yet, In September of 2022 the White House announced that it’s not out of the realm of possibility, even going as far as describing a few of the broad technical details and benefits of a digital form of the dollar.
It’s clear that the world is moving toward the creation of CBDCs. Web3 technology advancements will also encourage countries to incorporate the latest blockchain technologies for their digital fiat.
Bloomberg first reported last Saturday that the U.S. Treasury Secretary Janet Yellen called for “very careful regulation” of crypto markets. Government issued currency in the form of CBDCs could be a response to crypto’s volatility.
While established cryptocurrencies like Bitcoin and Ethereum are here to stay (and the push for their regulation suggests as much) mass adoption of CBDCs by governments around the world would not offer the same investment opportunities that crypto does. Instead, it would open up a new global market of easily accessible and transferable funds.
How Would Blockchain-based CBDCs Work?
CBDCs would be backed and controlled by a central bank, but the record of transactions would be kept on a digital ledger on a blockchain. While the central bank provides security against claims and proof of reserves, the blockchain provides transparency and acts as a single source of truth validating every transaction.
CBDCs can be used for retail payments between individuals and businesses or wholesale settlements between banks.
The Pros of CBDCs
Our current financial system suffers from costly transaction fees and slow payment processing speeds. Western Union wire transfers can incur fees of $35 per transaction or more. Considering that Western Union’s app allows the wire transfer of funds to over 200 countries, the adoption of a common platform for CBDCs based on smart contracts would essentially save trillions of dollars in fees every year.
Also, because blockchain-based CBDCs give end users the ability to transact directly, funding time is greatly improved with the cutting out of intermediaries. It would also eliminate the institutional and human error aspects present in current cross border payment systems and even e-commerce.
People living in areas of the world far from physical banks would probably benefit the most from CBDCs, since they would only need a connected mobile device to send and receive funds.
As long as a country’s government doesn’t fail, the backing of its CBDC would be secured–eliminating the inherent risks of privately created crypto.
While blockchain technology still seems mystifying to investors who don’t hold Bitcoin or other forms of crypto in their portfolios, the millions of people around the world who already invest in crypto realize how much faster and simpler transacting blockchain-based CBDC would be.