Central Bank Digital Currencies (CBDCs) are the virtual form of fiat currencies. A CBDC is an electronic record or digital token which centralized and legal tenders issued by central banks. With the blooming of the crypto market, interests in CBDCs have increased dramatically since last year.
In fact, CBDCs are now in various stages of research in many countries to indicate how they could work in practice.
China is the forefront of CBDCs development when this country is expected to launch their own CBDCs in 2022. Besides China, some of the most significant results have also been emerging from other Asian countries.
After China is Hongkong, they have been working on several pilots and intending to create a digital currency for settlement between banks. By 2019, this project had joined forces with the Bank of Thailand, and after that are the involvements of Central Bank of the United Arab Emirates, the Digital Currency Institute of the People’s Bank of China, and the Bank for International Settlements. The project is now aiming for larger goals, one of those is to create a cross-border payment.
Outside of Asia, England is also rolling out their CBDC to pay for social services like payrolls, pensions, etc.
During The Bank of England live stream, to support the CBDC initiative, Sir Cunliffe, England Deputy Governor For Financial Stability, cited the rapidly declining use of cash in recent years, which was greatly accelerated by the effects of COVID-19 that discouraged physical contact, leading 30% of transactions now occur via e-commerce. For that reason, CBDCs are expected to experience tremendous growth once widely used.
Moreover, apart from being a system of efficient retail payments, CBDCs can help governments better control illicit payments and tax evasion. This can also help governments combat money laundering and terror financing.
A digital currency shall also help governments in the quick transfer of public funds or emergency grants in a crisis situation (such as the Covid-19 pandemic). Payments made using CBDCs can also reduce the burden of settlement risk on the financial system.
About the growth of digital currencies, Sir Cunliffe added:
“It’s quite difficult to predict how innovators will take money and actually use money going forward. But we are starting to see programmable money being used in the crypto world. And I would expect we would see a similar revolution in the functionality of money driven by technology.”
All critical success factors for the adoption of CBDCs lead us to these questions: Do the benefits of a permissionless, open and decentralized public network such as Ethereum outweigh the drawbacks? Or would a permission implementation be a better option?