As of the Weekly Journal’s deadline this week, there are nine countries throughout the world that have fully launched a central bank digital currency (CBDC). Eight of the nine countries are located in the Caribbean, as reported by the Investopedia website.
The central banks of the island nations of Montserrat, St. Kitts and Nevis, Antigua and Barbuda, Dominica, St. Lucia, St. Vincent and the Grenadines, Grenada and the Bahamas, all have launched their own CBDCs for wholesale or retail payments, or both. There are two other nations (Jamaica and Anguilla) where the CBDCs are in a pilot phase.
“All these institutions are exploring, if not implementing, their own CBDCs because of the technology supporting them, which allows them to be immutable, decentralized and traceable,” said Eduardo Burgos, Chief Operating Officer at Abexus Analytics.
Burgos pointed out that, while most of these initiatives are still in the research and development stages, “this is something that will not go away.”
“It will take some time for the banks and the different governments to insert a form of crypto currency into their financial systems to make them more efficient, but it is going to happen,”he said.
What are CBDCs?
Central bank digital currencies are a form of electronic money that citizens can use to make payments and/or store value. This kind of electronic money is issued by a central bank and is universally accessible.
While CBDCs are generally considered a form of cryptocurrency they differ because governments recognized them as legal tender within the issuing central bank’s jurisdiction. This means that individuals and businesses in general are compelled to accept them as a form of payment.
There are two kinds of CBDCs depending on the use they will receive. Retail CBDCs are based on distributed ledger technology and there is a possibility for interest rate applications. Wholesale CBDCs, on the other hand, allow to resolve liquidity and counterparty risk issues and improves the speed and security of financial transactions.
“The immutability of the transactions – meaning that, once completed, the transaction cannot be altered or erased– is one of the characteristics financial institutions are looking into to make their own systems more efficient,” Burgos said.
According to the economist, the blockchain technology behind CBDCs and cryptocurrencies should not be considered as an interchangeable term. “Cryptocurrencies are not blockchains, but an application of the blockchain, onto which other applications could be integrated,” he explained.
Why CBDCs need to be issued?
It only begs the question: why should another form of legal tender (CBDCs) should be issued if a country already has its own physical cash? Are they not used for the same purpose – to pay for goods and services?
It cannot be denied that CBDCs make paying for good and services, both at the retail and wholesale levels, safer and more efficient. Consider it similar to the average employee receiving his salary via a direct deposit transaction to his bank account.
It cannot be denied either that the private e-money (Bitcoins, Litecoins, Etheriums, etc.) is on high demand. Should any of these currencies become a standard, its users would be at the expense of its providers whose only interest is to maximize their profits instead of the best interest of the public. Still it is argued that the standardization of CBDCs will help “boost crypto adoption as people will have access to the platforms to convert cryptocurrencies into legal tenders,” (www.hedera.com).
On this subject, governments would have a “competitive lead” over private cryptocurrencies.
For Burgos CBDCs were not conceived to exclude or displace hard cash, but admitted the issuing an additional fiat currency could have an impact on the countries’ economy, and the world’s.
“There is a possibility for an unfair competition between the two forms of currency… the main argument being: which is the best way for transferring value?,” Burgos mused. “Nevertheless, they could safely coexist.”
For economist Adrián Alós, and CEO of Abexus Analytics, CBDCs would not have the same impact Bitcoins or Etheriums have. “They would be just another form of legal tender,” he said.
Alós highlighted the fact that CBDCs are mainly used in assets’ markets and their value is dollar based. And, despite they being less volatile than private cryptocurrencies, their volatility is still significantly enough to be used, preferably, as an investment tool rather than as fiat currency.
Burgos argued that central banks can use CBDCs as a mechanism to provide access to people who do not have access to traditional banking.
“Of course access to digital banking would depend on the possibility of accessing the internet, and that in itself poses a specific hurdle. Still, there is a general tendency for the gap [digital divide] to close,” he anticipated.
Aside from providing access to banking services, governments would be bringing people who had been previously “bankless” into the formal economy and, via the CBDCs would start generating revenue for the governments via their taxes.
According to www.hedera.com, an open source public distributed ledger, “CBDCs will have far-reaching implications on the future of finance, including the buying and selling of digital assets and securities.” While the website does not venture a timetable for the standardization of CBDCs, it does mentions the conditions that must be met for this to happen. “This answer will rely on the foundations of a dedicated legal framework to facilitate the transparency, distribution, and issuance of a digital form of money by global governments. As regulators and central banks take concrete steps in the direction of establishing CBDCs, the world will begin to embrace digital currencies as a standard.”
Burgos on his part, warns that the future of CBDCs will depend on the governments’ adoption of regulations and policies that bring stability to them without “killing the industry”.
“Regulation brings stability to the market, but that stability cannot by at the expense of the industry’s innovation,” Burgos said.
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