CBDCs promise to combine electronic peer-to-peer remittances with the economic influence of fiat money. Which countries are working on implementing such a solution, and which already using it?
Central bank digital currencies (CBDCs) are exactly that: the digital versions of national fiat currencies. But how do they differ from the funds deposited in a digital bank account used to make cashless transactions with debit cards? Why do governments want to have CBDCs at all? Which countries have launched such projects already? We answer these questions. Read on.
CBDCs are digital versions of national legal tenders. They are similar to stablecoins, which are set at the 1:1 ratio in relation to the specific fiat currency. However, stablecoins — such as Tether (USDT) — are managed by private entities which store cash or cash equivalents issued by a central bank. They possess those assets for their stablecoins to resemble the exact value of fiat currencies.
The International Monetary Fund (IMF) sees CBDC as a new form of money that has a digital form, has been issued by the central bank of the given country and is intended as a legal tender.
Central banks print US dollars or pound sterling, so the tangible banknotes in your wallet do not meet the “digital form” criterion.
Furthermore, the money you transfer digitally through your bank is actually a series of electronic deposits secured with the assets of commercial banks — 97% of the money owned by ordinary people and enterprises are in fact deposits of such banks.
The biggest cryptocurrency of the world — Bitcoin — meets two of the above criteria: it is digital and serves now as a legal tender in El Salvador. However, it has nothing to do with the “CB” part of the CBDC acronym. It is not issued by the Central Reserve Bank of El Salvador — even if the bank mined Bitcoins in massive numbers, this wouldn’t count as money issuing.
The countries developing central bank digital currencies often define blockchain as the basic technology for CBDCs, but in this case, a central bank retains control over ledgers in the end. On the other hand, cryptocurrencies — in and of themselves — are decentralized and do not need any central authority to carry out their work.
There is plenty of ways in which countries implement CBDCs practically. The currencies are usually supported by mobile wallets similar to Apple Pay or Google Wallet.
In its yearly report (June 2021), the Bank for International Settlements provided three reasons for the recent increase in CBDC numbers: interest in Bitcoin and similar cryptocurrencies, a debate about stablecoins and the entry of Big Tech into the world of finances.
The concerns related to large technology companies’ interfering with finances, such as the Diem stablecoin supported by Facebook, are also shared by the European Central Bank (ECB). In its report from June 2021, ECB stated that the governments which avoid the implementation of CBDCs may face threats to their financial systems and monetary autonomy from “foreign tech giants potentially offering artificial currencies in the future”.
However, there are many more reasons.
According to the studies of the Institute and Faculty of Actuaries conducted in March 2019, CBDCs can also help accelerate money payouts when crisis strikes. In the report dated July 2021, IMF stated that CBDCs can promote financial inclusion as citizens will not require a bank account to pay with CBDCs. This is huge for countries such as Indonesia, where one-third of the population does not have access to traditional finance despite the fact that they have mobile Internet access.
It’s virtually set in stone that more and more countries (with China at the forefront) will be releasing full CBDCs in the foreseeable future. China will introduce their electronic yuan during the Winter Olympic Games in Beijing in February 2022. However, some American senators called American athletes to abstain from “accepting or using the electronic yuan” during the Games, afraid that it may be used to invigilate visitors to China “on an unprecedented scale”. Concerns over threats to privacy may intensify.
Some CBDC proponents praised the digital currencies as a solution ensuring privacy; in June 2020, Fabio Panetta, Member of the Executive Board of the ECB, argued that the digital euro will be more private than privately issued stablecoins as “we have no commercial interest in storing, managing or monetizing the data of users”. That said, a lot of other commentators have expressed concerns about the effect of CBDCs on privacy as they give countries an opportunity to keep strict control over cash flows at the macro level and — more problematic still — at the individual level. Mu Changchun, head of the Digital Currency Research Institute of the People’s Bank of China, stated that the electronic yuan will feature “limited anonymity”; small payments will be connected with users’ telephone numbers and larger ones will demand more extensive KYC data.
Conservative US legislators argued that the Chinese digital yuan may be used to “expand the national invigilation initiatives” and even “force party discipline”. Congressman Tom Emmer (R-MN) has pointed out that CBDC would be beneficial if and only if it was “open, permissionless and private”.
ORIGINAL ARTICLE HERE: https://medium.com/etheros/what-are-central-bank-digital-currencies-what-is-the-purpose-of-central-bank-digital-currency-eb611683b580
