Cryptocurrencies or digital currencies have rapidly evolved from being some form of “nerd money” to becoming the driving force of a new global financial system. As they grew by the day and reached a wider population, the first instinct of most governments was to ban them. After several failed attempts at doing that, they finally took measures to regulate the flow of digital currencies with better laws.
And as digital currencies keep surging to new heights of adoption and innovation, many governments worldwide are now taking measures to build their own digital currency to keep up with the competition. Known as central bank digital currency, or CBDC, these currencies may or may not resemble the traditional form of digital currencies.
Unlike other private digital currencies, CBDCs will be state-backed currencies. They will be a digital representation of the national currency of a country, pegged in a 1:1 ratio. And the central banks will have complete control over its operation.
A brief overview of countries working on a CBDC
China was the first mover in the CBDC race. The People’s Bank of China completed the backend development of its CBDC more than two months ago. Currently, it is conducting pilot tests of its CBDC — officially called “digital currency, electronic payments” (DCEP) — for small retail transactions across major cities.
Many industry experts consider China’s CBDC progress the biggest threat in decades to the dominance of the U.S dollar. This has also forced the U.S to ramp up its digital currency efforts, but its plans are still far behind any actuation.
Other major countries such as Canada, Singapore, South Africa, Russia, and France are also working on their CBDC projects.
Major challenges for CBDC success
Government’s lack of understanding
Today, most governments are speculating the possibilities of creating their own digital currency. But their major hurdle is the lack of clear understanding of digital currencies and how they could regulate them. To triumph over the odds, regulators have set up groups to closely examine CBDCs and formulate detailed roadmaps for development.
Finding a suitable design
Most governments and central banks are not big fans of the traditional form of digital currencies. They do not want to make it as transparent and open as Bitcoin or Ether. But they also do not want to miss out on the benefits offered by blockchain. Further, they aim to make it simpler and easily accessible to everyone at all times. To work out a plan for such a national digital currency has become a time-taking task.
The risk to the current banking system
Digital currencies are often seen as a risk to the current financial system. Governments are especially sceptical about the amount of transparency and openness digital currencies bring to financial transactions. They also see it as a risk to the dominance of paper currencies.
On the other hand, commercial banks’ business almost solely relies on holding funds of individuals and corporations. This is the primary way for commercial banks to make money. CBDCs may disintermediate money management and allow people to directly store their funds in central bank digital currencies and cut off Commercial banks ledger money circulated in monetary system that is not only threatening the profitability of commercial banks but disable the reserve banks present day monetary system.
Central bank digital currencies are already here. And countries that delay the adoption of CBDC will only be left behind in the path to digitisation and innovation. While the shift from the current economic model to a new one is full of challenges, the evolution is much needed and almost inevitable.