By Judith Riseshine
Amid the widespread proliferation of Bitcoin, Ethereum and other forms of cryptocurrency worldwide, governments are scrambling to jump start their own Central Bank Digital Currency (CBDC) movement.
Seen as a threat to the traditional banking systems that operate under a country’s regulatory authority, the meteoric rise of cryptocurrency and the technology undergirding it known as blockchain are fueling government adoption of centralized digital currency alternatives.
So what is a Central Bank Digital Currency? In short, it’s the use of blockchain-based tokens as a digital form of fiat currency. CBDC’s are issued and regulated by the monetary authority of a particular country.
Currently a number of countries are actively pursuing CBDC projects through their individual central banks. Most encompass the five largest currencies including the U.S. dollar, the euro, the Chinese yuan, the Japanese yen, and the British pound.
In a recent paper by the International Monetary Fund on central bank digital currencies and their legal implications, researchers expressed concern as to whether CNBC’s fall under the definition of money noting that it is more difficult to amend monetary laws related to payments than central bank laws.
Questions remain on key issues like legal tender status, state issuance rights, convertibility, private law privileges, counterfeit prevention and cybercrime. Moreover, each country is bound by its constitution making it easy for some to reform their monetary policy while being more difficult for others.
Nevertheless, introducing CBDCs continues to be a top-of-mind priority for central banks worldwide. China arguably is at the forefront of this movement with the country’s government choosing to use a digital yuan as a testing tool.
According to a November 2, 2020 Reuters press release, in excess of 2 billion yuan ($299.07 million) has been spent utilizing China’s new digital currency, encompassing 4 million separate transactions. As a result the country’s digital yuan is one of the most advanced central bank digital currency (CBDC) projects taking place across the world.
In another Reuters report dated December 3, 2020, it was noted that Switzerland’s central bank has also successfully completed a CBDC trial.
Sweden, too, is nudging closer to eliminating cash entirely from its society. The country recently announced a study to explore the possibility of introducing digital currency into their central bank. Former chairwoman of the Riksbank finance committee, Anna Kinberg Batra, will lead an inquiry, which is expected to be completed in November 2022.
Sweden has been engaged in exploring the digital currency landscape for some time now, with the percentage of cash payments there declining from 40% in 2010 to 15% by 2016. Now with the pandemic having further accelerated this trend, the Risksbank estimates that cash usage is hovering below 10% of the overall economy.
A collective of six banks, including the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank (ECB), the Sveriges Riksbank (Sweden), the Swiss National Bank, as well as the Bank for International Settlements (BIS) have established a central bank digital working group. The aim of this group is to do a pilot on how decentralized ledgers and other emerging technologies can manage payment systems traditionally handled by central banks and the financial industry.
In the end, the widespread adoption of CBDCs is largely predicated on their ability to work in a wide variety of settings and locales. Thus, the heavy lifting required on the part of central banks in pushing these initiatives forward will be a massive undertaking due to their vast and complex nature. Ultimately it will require deep engagement from key stakeholders around how critical policy and design decisions are being shaped.