Crypto – it’s decentralized, that’s the whole point right? True; the many well-known cryptocurrencies such as Bitcoin, are by design decentralized. Meaning that the database that underpins BTC’s transaction infrastructure (its virtual ledger book) is distributed such that many copies of the transaction ledger exist across a global network of computer nodes, all with equal standing. Consequently, BTC transactions aren’t regulated by central authorities. Instead, they’re monitored and validated through a decentralized mining process, effectively scrapping any need for centralised intermediaries.

The recent surge in interest surrounding cryptocurrencies in a very real and dramatic way poses a threat to traditional banking. With central banks being unable to control the growth of crypto and the push into decentralized finance, many of these institutions are launching their own version of digitally based currencies or at least contemplating it. 

Enter, into the monetary landscape, a new concept: central bank digital currencies (CBDCs). 

What’s a CBDC?

A CBDC is a virtual form of a fiat currency of a country. Simply put, they’re government issued digital currencies officially designated as a source of public/private debt repayment. As a digital fiat currency, they’re backed by the full faith and credit of the issuing governmental body. The aim of CBDCs is to combine the best parts of the two worlds: the ease and security of digital payments coupled with centralized control over the currency’s monetary policy. 

On this line of thought, the fact that many CBDC’s aren’t backed by any physical asset means that the issuing body can control their supply with a great deal of flexibility. Or what many central bank critics call “printing money.” By contrast, Bitcoin’s supply is finite. 

Although a majority of global currencies in circulation are currently held in digital form, most of them are privately issued commercial bank liabilities. In the US, the fact that commercial banks can convert their privately issued liabilities into central bank liabilities–at par–is what allows privately issued digital dollars to be linked–at par–to publicly issued physical dollars.

In effect, CBDC’s already exist in some form: as commercial bank digital deposit accounts – reserves – held at their respective central bank. What this new shift means is that central banks could potentially start issuing digital currency directly to the general public. Basically, the introduction of a retail CBDC will allow regular individuals to create and hold deposit accounts at their central bank.

Why use CBDCs?

Today’s world is becoming more and more reliant on technology. The majority of people now have a smartphone, the introduction of CBDCs could certainly foster inclusivity across the financial services space. In countries with rural areas lacking in banking infrastructure such as ATMs or branches, CBDCs could be a game changer. 

CBDCs also have 24/7 availability meaning people aren’t restricted to banking hours. They make it easier to give out money to the population in times of crisis such as natural disasters. In the case of COVID19, the US resorted to distributing a sizeable portion of fiscal stimulus in the form of checks and debit cards, creating opportunities for criminals to either steal or fraudulently use funds that were earmarked for a citizenry struggling with the worst public health/economic crisis in generations. 

If they’d used a CBDC the government would be able to ensure that this money had gone to the right people. 

Why steer clear of CBDCs? 

It can’t be denied that central bank digital currencies do come with risks to the people, the government and central banks. The main danger for individuals is a potential impediment to personal privacy.

In the case that central banks decide to have their CBDC’s registered with a named owner – which they’re incentivized to do to prevent CBDCs from being utilized for criminal purposes; monetary authorities would effectively have a full glimpse into the transactional activity of every national citizen who uses them. It’s certainly not unreasonable to think that this massive amount of incoming data could be used by government officials for pernicious purposes.

Countries with CBDCs

So, which central banks have actually got involved? For now, no major national economy has yet to implement a fully working CBDC. That doesn’t mean to say there isn’t a lot of interest, though. The Bank of England was the first country to bring out a CBDC proposal dubbed ‘Britcoin’. Canada and the Marshall Islands have since followed suit. So have Uruguay, Thailand, Sweden, Venezuela and Singapore, all nations now researching the possibility of introducing a CBDC.

Meanwhile, the People’s Bank of China has selected six state-owned banks earlier this year to begin testing out the implementation of digital yuan wallets. Despite the fact that the PBOC has yet to establish a formal timeline for the release of their CBDC, the results from their trial-run seem to reinforce the likelihood of eventual issuance. A recently published research paper tracked 71 million digital yuan transactions so far. That represents an aggregate transaction volume of about $5 billion. 

The race towards CBDC adoption and implementation has effectively created a “monetary arms race” among the top central banks. Looking to avoid large capital outflows or a reduction in domestic currency demand associated with the release of new, attractive means of digital payment from other national central banks, a FOMO mentality has developed across the central banking landscape. According to a report from the Bank for International Settlements (BIS) this year, most central banks have started moving from conceptual research into CBDC’s into practical experimentation with them. In the event that a few major central banks start issuing CBDCs to their respective populations, many more could rush in with their own alternatives to avoid being left behind. 

With all eyes fixed on central banks, a guessing game has erupted: who will be the first. Could it be the Venezuelan “Petro” or the Russian “Crypto-Ruble?”. The consequences and implications of this global experiment are monumental, to say the least. With continual pressure being exerted from a growing public interest in cryptocurrencies, monetary authorities are scrambling to keep pace.