Central Bank Digital Currencies: the Road to the New World Economy

Konstantin Anissimov, executive director at CEX.IO, shared his opinion on the prospects of the development of state digital currencies.

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With the rising demand in digital payments, central bank digital currencies (CBDCs) have become a hot topic in the financial industry.

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Based on some form of distributed ledger technology, CBDC is digital cash issued and controlled by a government's central bank.

While they are expected to function similarly to cryptocurrencies, CBDCs will feature centralized networks where the state has increased control over the users.

With that said, central banks worldwide are racing to issue their state-controlled digital currencies, which are expected to cause drastic changes in the world economy.

The State of the Central Bank Digital Currency Race

According to a recent survey among central banks, 46 nations are considering or already developing their CBDCs.

By achieving significant progress in the development of its CBDC, China is undoubtedly leading the race.

In addition to completing the development of the digital yuan's back-end architecture in June, the People's Bank of China was reportedly testing the Asian nation's CBDC in four cities in April with draft laws ready to speed up the implementation of the state-issued cryptocurrency.

Following China, Sweden has also secured a promising position in the race by running pilots for its e-krona project since February 2020, which the European country is expected to finalize by early 2021.

The Bank of Japan is also working on a state-issued digital currency, announcing proof-of-concept tests for the digital yen in early July.

The European Union entered the central bank digital currency race last year when the European Central Bank confirmed that it is working on both a retail and a wholesale version of the digital euro.

However, while both the US and the UK consider the development of their CBDCs, the two countries have been falling behind in the race.

The United States is still discussing whether to issue a central bank digital currency, having held multiple meetings about the topic last month.

Earlier this month, Bank of England governor Andrew Bailey stated that the central bank is looking into the question of whether to create a digital pound.

Interestingly, as the UK is about to exit the European Union after the transition period ends in January 2021, it has the advantage over the region's other nations as the government won't have to deal with EU laws anymore regarding the issuance of its CBDC.

However, to take advantage of this, the UK has to act fast and start working on the digital pound to avoid falling behind in the race as other countries have already made good progress in developing their central bank digital currencies.

What Are the Potential Benefits and Impacts of CBDCs?

While central bank digital currencies have been the point of discussion in the past, they have become even more critical in the recent months.

As a result of the ongoing COVID-19 pandemic, activities are shifting from offline to online, and consumers are increasingly looking into digital payments to replace cash transactions.

To fulfill the surging demand for digital payments, it makes sense for governments to develop their own CBDCs.

Another reason why central banks are developing state-issued digital currencies can be attributed to the growth of the cryptocurrency sector, which increased the share of privately issued funds.

By issuing their own central bank digital currencies, governments seek to regain this lost control over money issuance.

Issuing a CBDC allows the government to create a digital payment system where they have increased insight and control over their citizens' finances.

While this rise in government control has its downsides, central banks can use it to crack down on illegal payments-related activities, such as fraud, money laundering, as well as terrorist financing. Governments can also utilize the data they collect in CBDC networks to boost taxation efficiency.

Furthermore, central bank digital currencies can provide a viable solution to the unbanked with a digital payment network accessible to everyone.

By creating a central bank digital currency, governments can create a more stable, resilient, and diverse payments landscape.

Governments can use CBDCs to replace current cross-border payment networks – which have been often criticized for being obsolete, slow, and expensive – with an efficient system that enables cost-efficient and near-instant transfers between participants.

With the decline in cash usage and surging interest in digital payments, CBDCs have the potential to replace cash entirely.

If and when that happens, in addition to promoting macro-economic stability by applying variable interest rates, CBDCs will provide more options for central banks to develop their monetary policies.

The Road to the New World Economy

With the development of CBDCs, a whole new, different world of finance is being built now.

This new world economy will undoubtedly be complex and not without flaws. However, the opportunities it is said to bring are very exciting.

As the race is intensifying between central banks to develop their state-issued digital currencies, we are now witnessing the formation of a new ecosystem and the evolution of payment systems.