Central Banks Digital Currencies are The New Future of Money

More than 60 countries are currently at different stages of studying or developing a digital currency, according to research group CBDC Tracker (1). The Bahamas has already issued a digital currency called the Sand Dollar to address financially underserved populations. The UK government recently announced it has begun preliminary studies for the development of its own CBDC. They just might call it Britcoin 😉.

China is the country with by far the most advanced digital currency. It recently launched a pilot program in some of its cities by rolling out the Digital Yuan. The central Bank of China uses the retail applications model where citizens directly get money from an app called the Digital Yuan app, or a card for the less tech-savvy. Payments are made by scanning PR codes. There is also support for offline usage in selected places. 

Fun fact: China is incentivizing usage of the Digital Yuan by giving people free money. It conducted money lotteries where lucky app users get some Digital Yuan that can be used for purchases at supported stores. Talk about free money to test money. China also plans to give free Digital Yuans to athletes during the Beijing Olympics in 2022, an indication that the digital yuan has global ambitions.

Necessity is said to be the mother of invention, and Central Banks Digital Currencies (CBDC) are arguably offshoots of the concerns that governments around the world have about cryptocurrencies. This is because most virtual currencies like Bitcoin and Ethereum use a decentralized system that is not within the immediate control of any single government or authority. A lot of governments have claimed that such virtual currencies are a threat to the stability of the economy. Several other concerns such as the problems of money laundering, tax evasion, and illegal purchases have been raised.

At their core, CBDCs are electronic cash. What the governments are doing is to digitize their respective currencies. 

At this point, you’re probably thinking, “Aren’t most transactions already facilitated using a digital currency?” “When I perform electronic transactions like buying stuff with my card or send out money from an app, am I not spending digital currency?” 

Well, No. 

When you’re sending payments over any app or swiping your card, you’re transferring digital representations of physical cash over an electronic medium. Think of how easy it is to ‘cash out’ your money from all of these digital platforms. You can go to an ATM or banking hall and turn those figures in your bank app to cold, hard cash in a jiffy because each dollar in your account balance is represented by a dollar note in the custody of your bank. 

CBDCs on the other hand are fully digital. The digital currency is programmed by the government to eliminate physical cash. Instead of each dollar being represented by a physical note, it will be represented on the network by a unique code that will be transferred from person to person and bank to bank as the money circulates. 

Note: If you haven’t read the previous issue of this newsletter on NFTs, here’s the link to do so: How NFTs are Changing Property and Trade - The Fintech Breakdown Issue 2. CBDCs are essentially NFTs of individual currency notes or coins and that article will help you understand the underlying technology better.

We must note that CBDCs are not cryptocurrencies.

The only similarities CBDCs share with cryptocurrencies such as Bitcoin is that they are both data-based and don’t exist in the physical world. CBDCs are also not likely to be hosted on distributed ledger technology (blockchain) since they are centralized and intended to be controlled and monitored exclusively by the government.  

Why would central banks do this though? 

Firstly, control. Secondly, too, control.

Seriously, central banks want to have as tight a grip on their national economies as possible. It is why they use different measures like interest rates to control inflation, for instance. 

With a digital currency, a central bank will be able to automatically remove taxes from the funds you own, track exactly what each person is spending money on and even change the money’s features. For instance, payments made under a welfare system can be programmed such that the recipients can only use the funds to buy food, and the government could potentially make the amount a person owns increase or decrease in value depending on whether they want to encourage spending or saving. One of the features China is testing is for the digital Yuan to have expiry dates, which would force people to spend it and help the economy.

Clearly, this amount of control has massive pros and cons. It allows the government to control the economy on a granular level, and combat crime in real-time, especially corruption and financial crimes generally. On the flip side, it also arguably amounts to a severe invasion of privacy and could give governments a degree of power that would enable them to stifle opposition with unprecedented ease. There’s also the potential risk of technical problems which could severely disrupt economic activity. The amount of economic damage that would take place if all the money in a country becomes unusable for even a brief period of time would be near-catastrophic.

What do you think about central bank digital currencies? Are the national and individual benefits worth the downside? Please comment with your thoughts, subscribe to the newsletter, and share with others who would benefit.