CBDCs could be the next big thing for governments and financial institutions. However, a lot of users fear that it would give governments too much control.
What is a CBDC and why do we need it?
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CBDC is short for central bank digital currency, and is a digital token, similar to cryptocurrency, issued by a central bank. They are pegged to the value of that country's fiat currency.
There has been a rather large discussion with regard to CBDCs, as many countries are developing them, but the question on everyone’s minds is “why on earth do we need CBDCs if we already have a fully-established financial system?” Rolling out a CBDC doesn’t mean releasing a new cryptocurrency. There is a report by the Tony Blair Institute For Global Change highlighting that
So as an example, we can take a look at the report titled “
- Finance reporting where costs could shrink by 70% as a result of the optimized data quality, transparency and internal controls;
- Compliance with a drop by 30% to 50% at the product level due to the improved transparency and auditability of transactions;
- Centralized operations supporting functions such as Know-Your-Customer and client onboarding could see costs reduced by 50% by the establishment of more efficient processes;
- Business operations such as trade support, middle office, clearance, settlement and investigations could see their operating costs being lowered by 50%
The events leading to an interest in CBDC
If we look at the technology, we’ll notice that it’s being actively considered by over 100 countries today. However, the idea wasn’t created in the past year.
As an example, we can take a look at China’s ownership of US Treasuries. In 2010, the Chinese government was holding on to 14% of US Treasuries. That number kept declining until today, where they’re only holding on to 4%. This trend coincides with bad US financial policy coupled with the existence of an alternative, that being the introduction of decentralization to our traditional financial infrastructure.
The Common concern: More control over you
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With the emergence of this concept, some users have become concerned, as this technology could provide governments with stronger control over your purchasing power and what you can do with your money. Additionally, the primary concern seems to be that CBDCs are programmable money that can be told to self-burn after a specific date, resulting in you having to spend your money, otherwise you may lose it completely. These all seem far-stretched, although we need to address these concerns in order to have a constructive discussion revolving around the net value the technology brings.
Centralization
The discussion around CBDCs have transformed into fears that they would lead to the disappearance of Decentralized Finance, but is there any merit to this fear?
DeFi will still flourish to expand its list of services and lead innovation initiatives, so its applications will always have an active audience.
Moreover, centralization only promotes mass adoption in decentralization, since decentralization erases the world boundaries between Internet users.
And CBDC comes to solve a specific problem in a specific sector of the economy. CBDC isn't going to cancel decentralization, as its primary task is to improve a specific sector, that being the traditional banking system. This means that there shouldn’t be concerns with regard to the development of CBDCs, as they should not affect DeFi in any way, shape, or form.
Many users also believe that since CBDCs are centralized and have nothing to do with cryptocurrencies. That isn’t entirely correct, however, because their development came as a result of the conception of decentralized technologies. centralization in and of itself is not evil. The moderate use of centralized services increases efficiency. Problems arise when this resource begins to be abused and is used for nefarious purposes. Centralized bank digital currencies will be an instrument that will allow the further development of new services aimed at making our experience with traditional finance more convenient.
The purpose of Central Banks is to be the lender of last resort while ensuring financial stability and consistent price level in the economy. While preserving the free market and allowing users to gain economic efficiency that facilitates digital payments in the most free and private way, central banks may allow national economies to flourish by boosting international trade and financial inclusion. This way, the central bank will continue playing its key role in maintaining infrastructure with minimal intervention, enabling competition among banks in a seemingly centralized but distributed protocol.
Additionally, the industry as it stands today has already seen centralized platforms. For example,
Making Money Moves
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When we talk about CBDC, it’s important to understand that it’s not just a theory anymore. There are big players in the industry playing roles to make this concept part of the financial norm. China has its own digital yuan already in circulation. Since October of last year,
The last two years was a successful CBDC experiment for China, with merchants accepting e-CNY payments to speed up adoption. China’s central bank is also
While China has the most advanced plans for CBDC, they’re far from the only financially influential government testing this technology. South Korea & Sweden are also 2 countries holding their own CBDC experiments. The US has ongoing prototype development while representatives, regulators, and the FED continue discussing the potential consequences of CBDC development.
Smaller states have lower entry costs with regard to CBDC as disrupting technology. Nigeria brought in eNaira, Ghana started the eCedi project, and the Bahamas introduced the
Do cryptocurrency prices affect the technology’s development?
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With current cryptocurrency prices dropping, the question on a lot of people’s minds is will CBDCs still capture international interest? The short answer is yes. Crypto’s price does not affect the general interest in the technology, as governments are exploring the underlying technology behind the concept. CBDC will not have any price issues, as it would act like a government-regulated crypto, which has its value pegged to the government’s national currency used in its TradFi (traditional finance) infrastructure.
While this may be a gateway for crypto’s regulation, it would truly incentivize mass adoption of cryptocurrencies by a large portion of the population. However, there are factors we need to consider for a CBDC blockchain. First one being the chosen blockchain’s scalability, as it has to be of utmost priority when discussing central bank digital currencies. These are going to be used by the majority of the population, so if the blockchain they’re based on cannot handle the network load, it’ll spell trouble for the system as a whole. The second factor is transaction fees. They must be almost non-existent, otherwise, the price for goods and services will only become higher as the technology is widely adopted, making it a worse alternative to cash and debit cards. Basically, the blockchain has to be fast, secure, scalable, and cheap. This rules out Ethereum as an option since the network’s gas fees have historically been notoriously expensive. Instead, we can focus on other blockchains. Just to paint a picture of what parameters to look for, we’ll use the blockchain Everscale as an example.
The network fee is 0.0004 USD, the average block time is 0.2 seconds, it has a TPS of 64,000 (with the potential to hit 1 million TPS), and has the SMFT PoS consensus algorithm, which surpasses the security level of all other PoS algorithms. To put it into perspective, banking systems can process 24,000 transactions per second or less, meaning that moving to a CBDC-based system will increase efficiency and transaction speeds. There was a time when the common opinion stated that crypto has a low throughput, which meant that if they were to succeed, they had to at least match the speed offered by Visa (24,000 TPS). That time is over and governments are taking note, which explains the sudden rise in interest with regard to utilizing crypto in the centralized sector.
With these 3 factors in mind, it’s no surprise that multiple governments have shown interest in this exact blockchain for their own CBDC experiments. DA5, along with Everscale &
CBDC: The Verdict.
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Just like every emerging technology, there will always be theories on how digital money can be used for evil. However, reality may prove these fears wrong. Its utility has become evident over the past 2 years, as plenty of governments have launched their own experiments that have showcased a positive impact on traditional financial organizations. Whether it’s regarding banks saving money, financial inclusion for unbanked users, or savings being passed over to the consumer, CBDC’s utility has become clear. Holding onto physical assets still remains significant, but no one can deny that CBDCs have the potential to increase the convenience factor by many folds while allowing easier, faster, and cheaper cross-border transactions while, at the same time, seamlessly integrating more users with the traditional banking system. That is why we recommend that you look into blockchains that have been leading the CBDC scene, as this will be the next movement that will help with cryptocurrency’s leap into the mainstream while bringing us consumers better financial services.