How, the idea stems from cryptocurrency, CBDC is not a cryptocurrency.
Table of contents
- What is CBDC?
- How CBDC works?
- What are the Use cases?
- Will U.S. replace cash or paper currency?
- Find Momentum but Concerns Remain?
- G7 Leaders Converge in Hiroshima to discuss Crypto.
- Challenges of Unified Approach to Government Currency
- Is It an opportunity for Global Cooperation
- Can You Invest in CBDC?
- What technology will CBDC use?
- Is CBDC the end of crypto?
- Is CBDC a good thing?
- Bank of America says CBDCS is the Future of Money.
- Bank of Japan has decided to Launch CBDC Pilot Program
- Which Crypto is Best for CBDC?
- Why are countries adopting CBDC?
- What factors did we need to consider for the successful implementation of CBDC?
- 3 Ways Digital Currencies could change Global Trade?
- 3 Potential Ways Digital Currencies could change International Trade
- Issues Caused by Digital Currencies
- What will replace Dollar?
- Is It the UPI for Fintechs?
- Comparison between a typical Cryptocurrency Bitcoin and CBDC – Table
What is CBDC?
CBDC – Central Bank Digital Currency
To begin with, a Central bank digital currencies are the digital form of a government -issuing currency that are not pegged to a physical commodity.
Central banks are issuing these, ,whose role is to support financial services for a nation’s government . And additionally, to support its commercial banking system,set monetary policy and issue currency.
Subsequently, it is also a liability of the central bank and denominated in the sovereign currency as is the case with physical banknotes and coins.
How CBDC works?
Specifically, Nation’s monetary authority or central bank issuing CBDCs ,that are the digital form of currencies.
Chiefly, CBDC promotes financial inclusion and simplifies the implementation of monetary as well as fiscal policy.
Simply put, rather than a new currency, CBDC is a form of central bank electronic money. Households and businesses to make payments.
What are the Use cases?
To begin with, CBDCs offer the potential to improve legacy cash use cases, such as by reducing cross-border transaction costs and enhancing financial inclusion.
Namely, examples of countries with CBDC initiatives include the following.
The Sand Dollar by the Central Bank of the Bahamas
The Naira in Nigeria
The Digital Rupee launched by the RBI of India
Digital Ruble by the Bank of Russia
India – Digital Rupee
Will U.S. replace cash or paper currency?
Chiefly, The Federal Reserve is committing to ensuring the continued safety and availability of cash. As well as considering a CBDC as a means to expand safe payment options.
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Find Momentum but Concerns Remain?
Florida’s move to ban CBDCs comes amidst increased talks and discussions on the development of CBDCs across the globe.
Notably, many central banks are considering launching their digital currencies to modernize their economic system. As well as to provide financial services to their citizens.
For example, The People’s Bank of China started the development of its e-CNY in 2014. As well as the country has launched numerous test pilots of its CBDCs across various provinces.
Recently, the coastal province of Jiangsu promised to launch a platform that will allow citizens to pay education fees using the country’s CBDC.
Aside from China, a number of other countries are either in the development or pilot stage. This includes South Korea, Japan, India, Russia, and more.
However, some analysts have raised concerns over the potential impact of CBDCs on privacy and financial independence.
Additionally, critics argue that CBDCs could provide a perfect tool for governments to control and track financial transactions, limiting people’s freedom to use their money as they wish.
Furthermore, because CBDCs would be digital and traceable, governments could monitor citizens’ transactions and even use them to determine a person’s financial history.
Which could potentially lead to negative consequences for certain individuals.
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G7 Leaders Converge in Hiroshima to discuss Crypto.
Mainly, leaders from the U.S., UK, Japan, and three EU countries will debate the new policy this week.
Developments in several countries suggest that a unified policy will not be easy.
Digital wallets must enforce rules around money movement to reduce laundering risks.
The Digital Money policy for central bank digital currencies (CBDCs) is becoming a top priority for global leaders at the Group of Seven summits held in Hiroshima this week.
The leaders will discuss crypto for money laundering and CBDCs’ roles in improved payments efficiency and financial inclusion.
G-7 decision-makers will also discuss a unified framework for central bank digital currencies.
The new policy will welcome guidance from the International Monetary Fund’s handbook.
The document is due for release at the IMF and World Bank Group’s meetings later this year.
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Challenges of Unified Approach to Government Currency
Notably, a unified digital currency system would need rules to function within and outside its originating country.
Unlike private cryptos, which are borderless, governments must define how it is used.
Arguably, digital wallets need specific rules on transactions based on global money laundering standards.
A recent European Central Bank (ECB) survey found that Europeans consider transactions between peers a critical digital wallet feature.
Thereby, rendering compliance a key consideration.
Recently, Samsung agreed to partner with the Bank of Korea to test instant person-to-person transfers.
An earlier central bank pilot exposed the money laundering compliance challenges of linking multiple remittances.
The Bank prioritized compliance over user privacy.
Notably, a U.K.Bank official recently floated the idea of real-time digital wholesale pound settlements,
Additionally, it plans to launch a new real-time cross-settlement system next year to enable fast interbank transactions and clearing.
Similarly, the U.S. will also pilot its FedNow instant settlement system in July, while the European Central Bank recently released its third progress report on a potential digital euro.
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Is It an opportunity for Global Cooperation
What’s more, there are more than 100 in the research or development stages. However, each country has a different motive for implementation.
In fact, it is exacerbating geographical fragility and financial instability.
Essentially, with the increasing impetus to issue a sovereign digital currency, there is a clear need to ensure that the new systems and currencies in place are interoperable.
Additionally, improve the global financial infrastructure.
Will Wholesale CBDCs would improve Cross Border Payments – Frech Central Bank Tests
Banque de France said it ran multiple experiments to test central bank digital currencies for wholesale payments. Issued “directly on” distributed ledger technology.
It will be improving its cross-border payments,settlement finality and security for a vast range of financial assets.
The French Bank began experiments on a wCBDC in March 2020. It conducted 12 experiments ,including one to settle a bond worth 100 million euros ($104 million) with Luxembourg.
Other experiments include projects with the Monetary Authority of Singapore ,the Swiss National Bank and the Innovation Hub of the Bank for International Settlements(BIS).
Most importantly, these experiments are showing a wholesale CBDC would “be a key for native digital assets and tokenized assets that fall under the category of unlisted financial assets. Which are currently settling.
Similarly, Central Banks the world over are actively experimenting in CBDCs to improve wholesale settlements,with monetary authority grouping BIS leading multiple experiments.
India began similar tests ,while the European Central Bank is set starting in 2024. The French central bank said supporting Europe’s exploratory work will be one of the next steps.
Central Banks must not be blind to the threats?
With cash on its way out ,many central banks around the world are experimenting with or in some cases rolling out retail central bank digital currencies.
Their time may have come and they have many advantages over cash, but CBDCs also pose threats to the very institutions issuing them.
Conversely, private digital payments are working well in many countries. Thereby limiting demand for CBDCs.
Central Banks face the challenge of making the latter viable in retail and peer-to-peer payments but not so successful that they displace private payments altogether.
Consequently, the notion of a CBDC as the digital equivalent of cash, bearing a zero interest rate and with no special features ,is giving way to the prospect of programming digital money for specific purposes.
With cash gone, other options also come into play. Imposing negative nominal interest rates to discentivise saving and boost demand in periods of extreme economic distress.
The programmable aspects of money facilitate contractual arrangements. Funds automatically releasing only when conditions are met by all contracting parties.
Dark side of CBDCs
Using cash anonymously and has a stable value (in nominal) relative to an economy’s unit of account.Central bank-issued fiat currency.
If units of central bank money with different characteristics are put in circulation, secondary markets for trading them get conceivable.
People who prefer to save rather than spend might willingly trade their “programmable” money at a discount.
Money in CBDC digital wallets is seen as a safer than that in commercial bank deposits.
After all, central banks never fail.A flight of money into CBDC wallets could decimate bank deposits and put central banks in the undesirable position of making credit allocation decisions.
How CBDCs are controlling the Risk?
New cryptographic tools could restrict the use of CBDCs by unverified persons while allowing for privacy in low-value transactions.
Capping balances in CBDC digital wallets would reduce the risk of deposit flight from banks.
Legislative guardrails could prevent central banks from becoming too closely tied to government operations.
Still innovations on money do pose subtle risks. Central banks are viewed as political agents. Their visibility into payment transactions is getting used for law enforcement. Or maybe surveillance.
Above all, in times of financial panic ,caps on CBDCA digital wallet balances could prove difficult to sustain.
Thereby, causing central banks to displace commercial ones as the main repository of an economy’s savings.
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Can You Invest in CBDC?
Given that, these are no different than an issuing nations existing monetary supply. It means the only way you invest in it is to hold the currency in your account.
In other words, investing is just like holding a nation’s physical cash in your hand today.
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What technology will CBDC use?
Chiefly, Blockchain or Distributed Ledger Technology (DLT) is one technology that can facilitate it. What’s more, it is likely a key feature that it shares with other crypto assets, such as Bitcoin.
Is CBDC the end of crypto?
Unlikely, since they serve different purposes. Although it will undoubtedly have an impact on the cryptocurrency sector. Namely, to what extent depends on the policies between jurisdictions.
Is CBDC a good thing?
Firstly, The current banking system necessitates an elaborate system of bank regulation to prevent bank failures. And bank runs.
Secondly, A government bankruptcy is less likely than a banking crisis. Certainly, there is much less probability of a run on this.
Given that, it can promote financial stability in the banking system. How it will affect Banks?
Since Banks lower their maturity mismatch when depositors have access to it. As well as reducing their exposure to depositor runs.
Further, Banks provide depositors with liquidity services. essentially, it is the ability to withdraw funds and make payments as needed.
Bank of America says CBDCS is the Future of Money.
Since, according to the Bank of America, CBDCS and stablecoins can revolutionize global financial systems simply put.
Truly, it uses blockchain technology to improve efficiency and reduce expenses. Stablecoins are cryptocurrencies attaching that market value.
Basically, to another stable asset in lay terms.
To clarify, Analysts led by Alkesh Shah, BoA Global Crypto, and digital asset strategist wrote that “CBDCs do not change the definition of money. But it changes how and when value is transferring over the next 15 years. “
Above all, it has the potential to revolutionize global financial systems and may be the most significant technological advancement for bank deposits.
Additionally, it will promote inequality among nations and will result in a loss of monetary sovereignty in layman’s terms.
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Bank of Japan has decided to Launch CBDC Pilot Program
Given that, only 4% of Japan’s total population uses or owns cryptocurrencies. Experimental testing of the digital Yen is expecting to happen in April 2023.
Finally, The Bank of Japan revealed on February 17, 2023, that it plans to launch a pilot program in the month of April 2023 to issue digital yen.
Additionally, the Bank is working hard to launch its own Central Bank Digital Currency in Japan to ease payment systems.
Subsequently, during a central bank meeting with private-sector executives Shinichi Uchida, Executive Director of Bank of Japan, said, “Our hope is that the pilot program will lead to improved designs through discussion with private businesses. “
Namely, the concept became popular after Nigeria and China successfully tested their digital currencies. Additionally, made them available to the public.
The United Kingdom, India, as well as, UAE, among others, are in the process of preparing a road map for launching and regulating their central bank digital currencies.
Truly, The Central Bank noted that it depended on the public whether to issue a digital yen.
Therefore, the Bank of Japan will “continue to make thorough preparations” and launch it as per the suitable circumstances.
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Which Crypto is Best for CBDC?
Further, Blockchain technology brings unique advantages to it.
Chiefly, Ethereum in particular is the most production-ready blockchain to support CBDC.
It truly matches requirements in terms of scalability and privacy.
Why are countries adopting CBDC?
First, some common motivation is promoting financial inclusion. As well as, by providing easy and safer access to money for unbanked and underbanked populations.
Essentially, by Introducing competition and resilience in the domestic payments market.
Moreover, which might need incentives to provide cheaper and better access to money. Thereby increasing efficiency.
What factors did we need to consider for the successful implementation of CBDC?
Firstly, these are becoming more and more interesting for governments. Eventually, as effective ways of managing the digital economy. Although, most central banks have begun implementation of the currency as concerns remain.
Additionally, an important success factor for the future of its regime is cooperation between the public and private sectors in layman’s terms.
Secondly, the participation of the private sector in developing, testing as well as, and deploying it will have several benefits.
Also, it will become important as it could play a huge role in the future of financial systems to simply put it.
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3 Ways Digital Currencies could change Global Trade?
Firstly, the growth in digital currencies could make cross-border payments more efficient. And essentially, help address the $1.7 trillion global trade financing gap.
Although, these burgeoning currencies may not solve all trade issues. However, it could further complicate the supply and demand of foreign exchange.
Especially, for countries with limited existing international trade.
Basically, to realize their full potential, the advancement of payment technology needs to be accompanied by the digitization of trade.
Digital Currencies – Currently, these are growing. Additionally, the market is valuing at more than $2 trillion and involving more than 15,000 varieties. In 2021, El Salvador even adopted Bitcoin as its legal currency.
Similarly, while private digital currencies are blooming, Central Banks are catching up.
Chiefly, in October 2021, Nigeria joined the Bahamas, the Eastern Caribbean States, and Cambodia as one of the first jurisdictions to officially launch.
Based on the Atlantic Council’s tracker, 14 countries have launched its pilots. And then, 41 are conducting research.
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3 Potential Ways Digital Currencies could change International Trade
- Firstly, Digital currencies could cause an increase in efficiency for cross-border payments.
- Secondly, these could provide alternative credit information for trade finance
- Thirdly, it could alleviate the issues of de-risking.
Issues Caused by Digital Currencies
Additionally, despite the promising potential, digital currencies, however, solve some existing problems facing International trade. Although it could also raise new issues.
a. Financial Inclusion – First, it will remain problematic for countries or communities that can not afford the digital devices needed to hold digital currencies.
Similarly, for those who do not have access to basic infrastructure such as electricity, internet, and identification services.
Also, those who do not have outlets to convert cash into digital formats.
b. Supply & Demand of foreign exchange – Secondly, it is debatable whether digital currencies could encourage all countries to trade more.
Additionally, the potential benefits may help increase trade volume for certain countries. Further, it does not change the fundamentals of international trade.
Which depend on comparative advantages. Similarly, for countries that struggle with economic or political stability. Similarly, they may continue to face these challenges even with digital currencies.
c. Implications for foreign direct investment (FDI) –
Intersection of cross-border investments and digital currency are raising many questions.
Additionally, the current framework, such as the bilateral investment treaty (BIT) and the protection it offers.
Digital currencies considered “covered investments” under BIT? Would BIT protection apply to investments made by and in digital currencies?
In fact, how would the tokenization of FDI work under the current rules? Both states and foreign investors need guidance on these questions.
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What will replace Dollar?
Chiefly, the currency wars are getting hot and it’s looking increasingly likely that the world is going to start moving away from US Dollar.
As a reserve currency gold or Bitcoin are the front runners to replace it.
Is It the UPI for Fintechs?
Firstly, CBDC opens up a new world for Fintechs. Especially, for international transactions to be part of international trade. Thereby, reducing the cost of transactions for global trade.
Most importantly the fall of fraudulent and failing crypto exchanges is coinciding with the rise of CBDC across the World.
Secondly, India has also successfully completed its launch and trials with the CBDC.
First & foremost, what is important to understand is that this ushered in a new way of doing not just transactions but trade.
Further, it will revolutionize the structure of trade and business contracts. Additionally, it fulfills the potential that decentralized finance promised.
Essentially, CBDC opens up a new world for Fintech for international transactions to be part of international trade and reduces the cost of transactions for global trade.
Basically, the cryptocurrency did promise international transactions but the underlying asset had no inherent value.
Especially, crypto-entrepreneurs hijacked the best intentions of decentralized finance (DeFi) technology.
Further, it used this to create fake currency, misleading and diverting DeFi’s true purpose.
Essentially, the purpose of decentralized finance was to liberate finance from the clutches of a few banks.
But crypto entrepreneurs have created such havoc of distrust that now the pendulum has swung the other way.
Now the irony is decentralized promise working as centralized digital currencies.
Additionally, in spite of cases of money laundering, fraud, and illicit drug trade, a set of lawyers, legislators, parliamentarians, and advocacy firms continues to push the Crypto agenda.
Basically, the advantage over other forms of currency is its intelligence. Its a leap in paradigm from currency being just a storage/transfer of value to intelligent money.
Essentially, if digital currency is issued by a central bank it has inherent value along with the fact that it can be programmed to be smart, intelligent, and capable of decision-making.
Consequently, almost every central bank in the world is planning it. This will fulfill the potential that decentralized finance once promised.
Additionally, the Atlantic Council has prepared a tracker. Further, it gives the details of rolled out by different banks.
For instance, 19 of the G20 countries are preparing to launch CBDC.
Currently CBDC is only seen as Digital Replacement
Currently, CBDC is a digital replacement of existing national currency or a response to cryptocurrency.
Lastly, In my opinion, the end use of CBDC cannot be limiting only to the role that currency has played in the past.
As it is using to program smart contracts and increase trust in commerce.
Ensuring trust by creating deliverable contracts of goods and payments facilitates transactions and in turn economic growth.
Basically, two unknown entities transact with each other when they know that the goods promised will be delivered and payment made.
Above all, building this trust boosts trade and commerce, this is the role that it will play. Till now in global trade, the delivery of goods and payment was being managed by a series of global banks, a multitude of contracts, inspection agencies, and checks.
Especially, when programmed to be part of a smart contract, will reduce these layers of paper contracts and checks.
Further, it will reduce cost the cost of trade or transactions both local and international.
Moreover, according to a study by Corpay, only the foreign exchange conversion cost could be as high as 4%.
And there are main hidden charges that emitters and even receivers have to pay. Further, this makes many trade transactions unviable.
Additionally, the promise of lower cost and reducing the global banks’ hegemony in transactions that decentralized finance offered with crypto assets can now be realized in a legitimate manner, simply put.
Really, it is thanks to the rapid expansion of cryptocurrency and the existential threat it posed to central banks and currency that is being rolled out.
Obviously, when it is applied to the area of digital global commerce it, will have a ramification for wholesale and global banking.
Essentially, this is an area that even the most well-funded fintech has not been able to breach. And this is because, while fintech may pride themselves on innovation, their area of operations has been limited to state borders.
CBDC can unleash innovation.
Further, this is where CBDC can unleash innovation at a global scale if it is built with the multi-country exchange in mind.
Especially, this is what the Bank of International Settlements (BIS) should insist that the CNDCs should do. Further, BIS should insist that it should not remain as islands of innovation in their own countries.
Additionally, BIS has been trying to standardize some of the operational aspects of it.
CBDCs are going to Disappoint?
Central Bank Digital Currencies will enter into a competitive field of payment solutions including stablecoins.
The world’s first central bank digital currencies will start arriving in 2022.
Indeed , a couple ,like the Bahamas sand dollar and the Nigerian Enira, have already arrived.
And people should have appropriate expectations because these early pilots are going to disappoint central bankers,blockchain enthusiasts and, most likely, end users as well.
While these are pitched as a kind of safer, government -backed alternative to fiat currency stablecoins,they are not going to arrive in any form that looks remotely familiar to existing stablecoin users.
To start with, they are unlikely to arrive on a public blockchain. That means you won’t be able to exchange your enaira for a CryptoPunk or park it in a deposit contract on-chain to earn interest.
Indeed, early these will not be programmable in any way. It will not be possible to use them in smart contracts as part of any decentralized finance (DeFi) ecosystem.
Central bankers, wary of the big systemic technical risks that could come from a programming flaw in a national currency ,are unlikely to enable Ethereum-style complex smart contracts.
Without programmability or access to a public blockchain,existing stablecoin users are unlikely to be won over or to see the value proposition at all.
But it could still be attractive, if they manage to solve interoperability issues between countries financial systems.
Non-blockchain – using consumers are also likely to be disappointed in many cases.In designing CBDCs ,central banks are struggling to balance the convenience of cash,pledges to respect end-user privacy.
As well as a strong desire to limit money laundering and criminal activity. Central banks are already discovering how difficult balancing these requirements is likely to be.
Nigeria’s eneira system, for example requires you have an existing bank account in order to open an account.
Going through the existing banking system takes care of know-your -customer (KYC) rules enforced by the global regulators.
Nigeria’s solution is fast and elegant but has limitations. Specifically, transactions can be tracked (though that’s not necessarily the case).
And because it requires an existing bank account ,the currency does nothing to “bank the unbanked”.
Similar limitations will likely affect all CBDC prototypes and will have to be addressed to scale these systems or make them attractive alternatives to stablecoins or other quasi-banking apparatuses.
At the consumer level ,CBDC experiments in 2022 will offer functionality comparable with familiar consumer payment services,only run directly by the central bank.
However, as central banks are not historically known for their consumer services, this may not produce the most compelling user experience.
Thats me being understated and diplomatic.
There is one final opportunity for CBDCs to make significant progress; tying together various national payment systems.
While a very large number of countries have already deployed in-country real-time payments,there is no comparable cross-border system.
The largest cross-border payment network is estimated to settle more than $400 billion in daily transfers between member banks.
First, a CBDC would preserve the coexistence of sovereign and private money in a digital world. This is not an abstract benefit to put it simply.
Second, it is the basis for financial and monetary stability. Ensuring competition and efficiency in payment markets.
But a Ccould generate even more benefits for users.
Finally, In an increasingly fragmented world, how can you ensure that innovations in financial market infrastructure are created with cooperation in mind?
Comparison between a typical Cryptocurrency Bitcoin and CBDC – Table
|Monetary Policy||Fixed. Only 21M Bitcoin will be created. Can not be debased||As determined by policymakers CBDCs are susceptible to monetary inflation.|
|Geography||Global, Accessible to anyone in the world with the internet.||Determined by policymakers. International settlement may mirror|
|Storage||Anyone can securely receive and store value with a Bitcoin private key.||Determined by policymakers. Users could be at risk of security if they don’t meet requirements.|
|Transfer||Anyone can transfer value with a private key and internet access||Determined by policymakers. Users could be at risk of censorship if they don’t meet requirements.|
|Hours of Operation||99.9% unique since inception.||Determined by policymakers. Automated monitoring may allow 24/7 uptime.|
|Blockchain Type||Permissionless (public) blockchains||Permissioned (Private) blockchains|
|Anonymity||Anonymous||Linked to an existing bank account and a corresponding amount of personal information.|
|Usage||Payments and speculation||Payments & other monetary transactions|
Please comment below about what you think of CBDC.
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Though the idea for Central Bank digital currencies stems from cryptocurrencies and blockchain technology, CBDCs are not cryptocurrencies. A Central Bank controls a CBDC ,whereas cryptos are almost always decentralized, meaning they can not be regulated by a single authority,such as a bank.
A CBDC is a digital form of central bank money that is widely available to the general public. “Central bank money” refers to money that is a liability of the central bank.
Last year’s FTX collapse served as a stark warning that the technology can be misused. With CBDCs you can enjoy the benefits of digital currencies even as government oversight reduces the risks.
For more efficient interbank payments ,wholesale CBDC is issued only by financial institutions and clearinghouses. With the emergence of private digital currencies such as Bitcoin ,Ethereum, Diem, or Libra ,CBDC often assumes to be implemented by using blockchain or DLT.
At the merchant-end,e-Re works on the QR scanning mechanism ,just like UPI,though the QR for e-Re and UPI are different.
Through interoperability ,the intention is to converge the QRs. The same QR code can be used as point-of-sale (PoS) for e-Re and UPI payments. This is at the front-end.