Emergence of Central Bank Digital Currencies

We are on the verge of a new financial frontier due to the emergence of cryptocurrencies, and this has changed the role of central banks in the monetary system. The growth of coins such as Bitcoin and Ethereum has taken some of the importance of central banks and spread it among thousands of computers around the world. This has not gone unnoticed by governments, and they have been looking for a more centralised, less volatile alternative. The introduction of Central Bank Digital Currencies (CBDC’s) may yet shift the power back to the banks. 

A CBDC is a seemingly antithetical take on the current cryptocurrency model. CBDC’s are digital forms of a countries currency. They have unique identifiers (similar to serial numbers on physical currency), and are the liability of the central bank, as opposed to private banks. This also means that all transactions using CBDC’s are registered by the central bank, as opposed to the blockchain, and as such, CBDC’s operate on an entirely centralised platform, compared to the typical decentralised nature of cryptos. CBDC’s will also be backed by reserves of gold or foreign currencies, as with regular currency.

While the idea of a government-crypto sounds far-fetched, over half the central-banks around the world have made some progress towards them. In particular, the Bahamas launched the Sand Dollar in October 2020, which is the digital version of the Bahamian Dollar. The Bahamas is an underbanked country, meaning that many of its citizens do not or cannot avail of traditional banking services. This is due to the remote islands, destructive weather patterns and low income of the country, among other factors.

This makes it a prime opportunity for CBDC’s. The Sand Dollar can work offline (such as during tropical storms), it allows interoperability among digital wallets and payments and near-instantaneous validation of transactions. This provides the citizens with significantly improved financial accessibility. This is only the first proper example of a CBDC in action, and it highlights the usefulness especially for lower-income and underbanked countries.

The Eastern Caribbean and Jamaica have similar projects underway, as do countries in Europe, Asia and beyond. In fact, with the Bahamian Dollar being pegged to the US Dollar, the US will certainly be viewing the Sand Dollar as a digital trial-run.

CBDC’s are not without their detractors, with many claiming that they ruin the point of cryptocurrencies by centralising them. They point out that this strips away another layer of financial privacy. With a CBDC, the government will know when you buy your coffee on the way to work, who sold it, and what time it occurred. Others argue that CBDC’s are an unnecessary layer on top of digital banking, and that they are simply a marketing campaign to draw people away from cryptocurrencies. 

While this may be true, the technical implementation of CBDC’s would bring many benefits to the way we deal with money. Firstly, international transaction times would be reduced from days to nearly instantaneous, and they would further be more secure and cheaper. They would be far more stable than current popular cryptocurrencies, provide a more concrete store of value compared to the more speculative nature of normal cryptos. Lastly, as highlighted earlier, CBDC’s may be an avenue of financial mobility for under-banked or unbanked communities.