WHAT’S THE STORY?
Who Cares About….CBDCs??
I was surprised to learn that the central bank of my country, Malaysia ( ), was joining forces with its peers in Australia, Singapore and South Africa to conduct a cross-border payments trial using different central bank digital currencies (CBDCs).
Almost 90% of the central banks have initiated a digital currency project according to the Bank for International Settlements, with the Sand Dollar of Bahamas being the first one that has been officially up and running!
WHAT ARE CBDCs?
CBDCs are simply a digital form of your notes/coins issued by the central bank. While CBDCs can be designed for limited use between financial intermediaries (wholesale CBDCs), this article will focus on retail CBDCs made for public use.
WHY ARE CBDCs IMPORTANT?
CBDCs and cryptocurrencies
As CBDCs become common, cryptocurrencies could potentially be phased out. The inflated nature of Bitcoin has already attracted the wrath of regulators, as seen last year when a Spanish market regulator warned about influencers’ responsibility to remind their followers about the risks of cryptocurrencies after Andres Iniesta promoted crypto-exchange Binance on Twitter (and don’t get me started on Tom Brady and Gisele Bundchen promoting FTX! – PW 😡).
Governments could regulate privately-issued cryptocurrencies used in crimes. The hackers in the Colonial Pipeline attack demanded payment via Bitcoin and new forms of “altcoins” such as Monero are becoming popular in the dark web as it obscures information about the receiver and sender.
Despite some voicing concerns about a central authority having unparalleled access to the data of financial transactions, this has also led central banks to test out pro-privacy designs to ensure that CBDCs’ remain popular among the masses and reduce the need for privately-issued coins.
CBDCs vs Stablecoins
Many organisations are trialling/ using Stablecoins as an alternative. Stablecoins do not suffer high price volatility as they are pegged to major currencies or commodities like gold.
However, these coins don’t seem to be flying well with central banks either. An increased use of stablecoins could mean less money in retail banks and this affects the ability of the central bank to set interest rates to manage inflation.
Currently, the nominal value of stablecoins has risen from $30bn to $140bn due to their growing popularity in being used for cheap transfers. CBDCs would bring the benefits of stablecoins while allowing authorities to control the flow of money via a digitalised quantitative easing.
CBDCs and geopolitical tensions
China had instructed companies, including McDonald’s, to expand their digital Yuan payment systems across in Chinese stores, prior to the Beijing Winter Olympics. For many, this highlighted the security implications of the digital Yuan, such as Beijing being given access to transaction data of American companies based in China. Its surveillance capacity could grow as China plans to make Digital Yuan accessible to non-Chinese citizens to beat the domination of the US Dollar in world trade and finance.
On top of current anxiety around China’s expansion of its nuclear prowess and the expansion of its soft power through the Belt and Road Initiative, one could also argue that the CBDCs will be the next frontier in determining global dominance of nations and exacerbate the ongoing tensions between the US and China.
Regardless of the debate that is occurring among experts on the design and manner of the rollout of CBDCs, it is undeniable that CBDCs will become a pertinent part of our lives in the immediate future.
This was written by Haamsaaveni (Hamsi) Kumar: an amateur iPhone photographer /Optimistic Man United fan /avocado sushi lover .