By Michael Megarit

Featured image

Did you know that the world’s cryptocurrency market is worth more than $3 trillion?

In just one decade, this novel asset class has disrupted the global financial industry.

Indeed, the rise of digital currencies has transformed how individuals and businesses view money. For the first time in history, people have access to a decentralized, transparent and seemingly efficient financial system that largely escapes governmental control.

The world’s central banks have taken notice and are keen to modernize their financial infrastructure.

While most central banks are simply studying digital currencies and evaluating their potential impacts on the monetary system, others have already introduced them into their respective economies.

In this article, we will define CBDCs, explain why they are being implemented and explore which countries are getting involved with them.

 

What is a Central Bank Digital Currency?

A Central Bank Digital Currency, or CBDC, is fiat currency issued in digital form. Instead of printing paper bills and minting coins, a central bank will produce money by inputting numbers on a computer or similar device.

In truth, most central banks already issue digital currencies. However, they are only used by banks and other financial institutions that use them as monetary reserves. Thus, the next logical step is creating a CBDC that the general public will be able to use to buy and sell goods and services.

In sum, a CBDC is nothing more than a digital banknote. It works alongside cash and bank deposits and is not intended to replace our current forms of payment – at least not for now.

 

Is a CBDC a cryptocurrency?

It is important to note that a CBDC is not a cryptocurrency.

In fact, the two are very different.

Indeed, cryptocurrencies are a form of private money. They are based on open-source and decentralized Blockchain technology that nobody really owns. A CBDC, on the other hand, is issued by a central bank, and the Blockchain remains private and centralized.

 

CBDCs and cryptocurrencies are two very different forms of money.

In addition, cryptocurrencies are not backed by anything other than a project, product, or network effect. Consequently, their prices are very volatile. In contrast, a CBDC is a liability of a given central bank, so it is pegged to a nation’s currency and holds its value over time.

 

Are digital currencies the natural evolution of money?

Traditionally, money comes in the form of banknotes and coins. However, modern technology enables governments and financial institutions to transition towards a more efficient money-management model.

Indeed, the world’s major economies are increasingly cashless. This trend was initiated by the adoption of credit cards and electronic bank accounts and has since been accelerated by the Covid pandemic.

Now, central banks and governments are considering digitizing the entire monetary system.

 

Developed market consumers have already adopted non-cash payment systems.

 

For now, physical paper currency is still widely accepted and used in day-to-day transactions. However, over time, it is reasonable to believe that the adoption of CBDCs, cryptocurrency and Blockchain technology will accelerate the transition to a 100% digital and cashless society.

 

Why are CBDCs being implemented?

In the USA, up to 5% of adults do not have their own bank account. In addition, 13% of American adults who do have bank accounts are considered underbanked, because they often use inefficient and expensive banking alternatives such as payday loans, check-cashing services and money orders.

In the emerging markets, these numbers are significantly higher.

Forbes claims that 1.7 billion people worldwide do not have access to a bank account. In many countries, up to 85% of the adult population does not have a bank account. This presents an opportunity to introduce CBDCs to people who will never experience the legacy banking system.

The main purpose behind the creation and adoption of CBDs is to establish a more accessible and inclusive financial framework. CBDCs will provide consumers and businesses with privacy, convenience, accessibility, transferability and financial security.

 

CBDCs will resolve a number of important challenges.

Furthermore, CBDCs will also simplify financial processes, as Blockchain technology allows for quicker settlements, greater security, reduced costs, and cheaper cross-border transactions. Indeed, a Blockchain consists of time-stamped record blocks with encrypted transaction activity which is audited continuously by all of the verified network participants.

In time, Blockchain technology could very well replace the existing digital infrastructure.

 

Do any countries already use CBDCs?

Dozens of central banks around the world are studying the potential impact of CBDCs on the world monetary system. In total, an estimated 100 countries are believed to be exploring CBDCs, whether it be researching, testing, or distributing them.

China is the world’s first major economy to launch its own CBDC.

At writing, there are several countries and territories that have launched their own fully-functioning CBDCs:

• China is the most advanced, having deployed the digital renminbi (called the e-CNY), and has more than 260 million users and nearly $14 billion worth of digital yuans transacted thus far.
• The Bahamas’Sand Dollar– the digital iteration of the Bahamian Dollar – has been in circulation since October 2020.
• The Eastern Caribbean Central Bank, which manages monetary affairs for Monserrat, Dominica, Saint Lucia, Grenada, Antigua and Barbuda, St. Vincent and the Grenadines, and St. Kitts and Nevis, introduced DCash, its own form of blockchain-based digital currency.
• Nigeria’s central bank introduced the eNaira, a digital currency pegged to the nation’s physical naira currency. The Nigerian public can purchase the eNaira through financial institutions then transfer the digital tokens to their own e-wallets.

 

How many countries are planning on using CBDCs?

In parallel, more than 80 countries around the world are currently exploring the possibility of implementing CBDCs in the near future:

• Sweden is developing a proof of concept and carefully studying the technology and implications of CBDCs. Sweden is already a near-cashless society, so the public would probably embrace the idea of a purely digital currency.
• The Federal Reserve of the USA released a report stating that a “CBDC could fundamentally change the structure of the U.S. financial system”. In March 2022, US President Joe Biden instructed federal agencies to evaluate what is needed to implement CBDCs.
• The European Central Bank also released a report stating that the “digital euro would be a risk-free form of central bank money”.
• India’s central bank announced it would release a digital rupee in 2023, which authorities say will be like “dematerialized bank notes”.
• In January 2022, the Bank of Jamaica’s Governor, stated that ““In 2022, we will begin planting roots of digital currency in hearts and minds of citizens”. Indeed, Jamaica plans to roll out its own digital currency later this year.
• The Bank of England is exploring the possibility of integrating CBDC into its financial system.
• The Bank of Canada is researching the impacts of implementing CBDCs.

Evidently, CBDCs are increasingly popular and will be introduced in most developed economies.

 

What are the risks of CBDCs?

As with any novel technology, CBDCs are not without risks.

In February 2022, the Federal Reserve of the USA released a paper in which they identify three main risks posed by the adoption of CBDCs.

The first risk is the fact that potential “security breaches from the systems that enable the use of a CBDC could have immediate effects on payment systems and consumers. An attack or disruption of a CBDC arrangement may lead to follow-on effects that may pose broader risks to financial markets, economies, and currency-issuing institutions”.

The second risk is the protection of users’ sensitive personal information. The Fed stresses that personal information needs to be “securely held to prevent harm to consumers from fraud and theft […] as well as unauthorized disclosure of information”.

The third risk is that fraud would “ultimately result not only in a loss of trust in the digital currency instrument itself, but also in damage to the reputation of the central bank.”

 

Michael Megarit is a partner with Cebron Group.

By Michael Megarit

Featured image

Did you know that the world’s cryptocurrency market is worth more than $3 trillion?

In just one decade, this novel asset class has disrupted the global financial industry.

Indeed, the rise of digital currencies has transformed how individuals and businesses view money. For the first time in history, people have access to a decentralized, transparent and seemingly efficient financial system that largely escapes governmental control.

The world’s central banks have taken notice and are keen to modernize their financial infrastructure.

While most central banks are simply studying digital currencies and evaluating their potential impacts on the monetary system, others have already introduced them into their respective economies.

In this article, we will define CBDCs, explain why they are being implemented and explore which countries are getting involved with them.

 

What is a Central Bank Digital Currency?

A Central Bank Digital Currency, or CBDC, is fiat currency issued in digital form. Instead of printing paper bills and minting coins, a central bank will produce money by inputting numbers on a computer or similar device.

In truth, most central banks already issue digital currencies. However, they are only used by banks and other financial institutions that use them as monetary reserves. Thus, the next logical step is creating a CBDC that the general public will be able to use to buy and sell goods and services.

In sum, a CBDC is nothing more than a digital banknote. It works alongside cash and bank deposits and is not intended to replace our current forms of payment – at least not for now.

 

Is a CBDC a cryptocurrency?

It is important to note that a CBDC is not a cryptocurrency.

In fact, the two are very different.

Indeed, cryptocurrencies are a form of private money. They are based on open-source and decentralized Blockchain technology that nobody really owns. A CBDC, on the other hand, is issued by a central bank, and the Blockchain remains private and centralized.

CBDCs and cryptocurrencies are two very different forms of money.

In addition, cryptocurrencies are not backed by anything other than a project, product, or network effect. Consequently, their prices are very volatile. In contrast, a CBDC is a liability of a given central bank, so it is pegged to a nation’s currency and holds its value over time.

 

Are digital currencies the natural evolution of money?

Traditionally, money comes in the form of banknotes and coins. However, modern technology enables governments and financial institutions to transition towards a more efficient money-management model.

Indeed, the world’s major economies are increasingly cashless. This trend was initiated by the adoption of credit cards and electronic bank accounts and has since been accelerated by the Covid pandemic.

Now, central banks and governments are considering digitizing the entire monetary system.

Developed market consumers have already adopted non-cash payment systems.

 

For now, physical paper currency is still widely accepted and used in day-to-day transactions. However, over time, it is reasonable to believe that the adoption of CBDCs, cryptocurrency and Blockchain technology will accelerate the transition to a 100% digital and cashless society.

 

Why are CBDCs being implemented?

In the USA, up to 5% of adults do not have their own bank account. In addition, 13% of American adults who do have bank accounts are considered underbanked, because they often use inefficient and expensive banking alternatives such as payday loans, check-cashing services and money orders.

In the emerging markets, these numbers are significantly higher.

Forbes claims that 1.7 billion people worldwide do not have access to a bank account. In many countries, up to 85% of the adult population does not have a bank account. This presents an opportunity to introduce CBDCs to people who will never experience the legacy banking system.

The main purpose behind the creation and adoption of CBDs is to establish a more accessible and inclusive financial framework. CBDCs will provide consumers and businesses with privacy, convenience, accessibility, transferability and financial security.

CBDCs will resolve a number of important challenges.

Furthermore, CBDCs will also simplify financial processes, as Blockchain technology allows for quicker settlements, greater security, reduced costs, and cheaper cross-border transactions. Indeed, a Blockchain consists of time-stamped record blocks with encrypted transaction activity which is audited continuously by all of the verified network participants.

In time, Blockchain technology could very well replace the existing digital infrastructure.

 

Do any countries already use CBDCs?

Dozens of central banks around the world are studying the potential impact of CBDCs on the world monetary system. In total, an estimated 100 countries are believed to be exploring CBDCs, whether it be researching, testing, or distributing them.

China is the world’s first major economy to launch its own CBDC.

At writing, there are several countries and territories that have launched their own fully-functioning CBDCs:

• China is the most advanced, having deployed the digital renminbi (called the e-CNY), and has more than 260 million users and nearly $14 billion worth of digital yuans transacted thus far.
• The Bahamas’Sand Dollar– the digital iteration of the Bahamian Dollar – has been in circulation since October 2020.
• The Eastern Caribbean Central Bank, which manages monetary affairs for Monserrat, Dominica, Saint Lucia, Grenada, Antigua and Barbuda, St. Vincent and the Grenadines, and St. Kitts and Nevis, introduced DCash, its own form of blockchain-based digital currency.
• Nigeria’s central bank introduced the eNaira, a digital currency pegged to the nation’s physical naira currency. The Nigerian public can purchase the eNaira through financial institutions then transfer the digital tokens to their own e-wallets.

 

How many countries are planning on using CBDCs?

In parallel, more than 80 countries around the world are currently exploring the possibility of implementing CBDCs in the near future:

• Sweden is developing a proof of concept and carefully studying the technology and implications of CBDCs. Sweden is already a near-cashless society, so the public would probably embrace the idea of a purely digital currency.
• The Federal Reserve of the USA released a report stating that a “CBDC could fundamentally change the structure of the U.S. financial system”. In March 2022, US President Joe Biden instructed federal agencies to evaluate what is needed to implement CBDCs.
• The European Central Bank also released a report stating that the “digital euro would be a risk-free form of central bank money”.
• India’s central bank announced it would release a digital rupee in 2023, which authorities say will be like “dematerialized bank notes”.
• In January 2022, the Bank of Jamaica’s Governor, stated that ““In 2022, we will begin planting roots of digital currency in hearts and minds of citizens”. Indeed, Jamaica plans to roll out its own digital currency later this year.
• The Bank of England is exploring the possibility of integrating CBDC into its financial system.
• The Bank of Canada is researching the impacts of implementing CBDCs.

Evidently, CBDCs are increasingly popular and will be introduced in most developed economies.

 

What are the risks of CBDCs?

As with any novel technology, CBDCs are not without risks.

In February 2022, the Federal Reserve of the USA released a paper in which they identify three main risks posed by the adoption of CBDCs.

The first risk is the fact that potential “security breaches from the systems that enable the use of a CBDC could have immediate effects on payment systems and consumers. An attack or disruption of a CBDC arrangement may lead to follow-on effects that may pose broader risks to financial markets, economies, and currency-issuing institutions”.

The second risk is the protection of users’ sensitive personal information. The Fed stresses that personal information needs to be “securely held to prevent harm to consumers from fraud and theft […] as well as unauthorized disclosure of information”.

The third risk is that fraud would “ultimately result not only in a loss of trust in the digital currency instrument itself, but also in damage to the reputation of the central bank.”

 

Michael Megarit is a partner with Cebron Group.