Central Bank Digital Currency (CBDC): Bank-Built Cryptocurrency?


The concept of Bitcoin when it was first created was to provide a decentralized platform for the people. The platform was intended to cut out the middleman, such as banks and allow individuals more freedom and fewer fees. Decentralized platforms like Bitcoin offered the people a means to store digital cash, as well as perform transactions that would typically need a third party processor to complete the transaction.

While the idea of a decentralized financial institution is still as strong as ever, the original design to be for the people, by the people has shifted. With a wider range of cryptocurrencies, tokens and blockchain technology, central banks are taking a closer look at how they too can implement the blockchain technology.

Testing The Digital Currency Waters

2018 may very well be a turning point for countries like Thailand and Venezuela as far as introducing and implementing digital currencies to the citizens. Both countries have plans to launch a central bank digital currency.

For Thailand, a pilot project to test the waters of how digital currencies and blockchain technology will work is underway. The press release that announced the Bank of Thailand's new project known as “Project Inthanon” aims to increase Thailand's financial sector by adopting new financial technology that will enhance operational efficiencies.

Project Inthanon involves incorporating the R3 blockchain consortium into the Bank of Thailand, HSBC, along with seven other Thai banks. Thailand is testing the waters to see the potential benefits of distributing ledger technology. In addition to introducing the tokens to the public, the project involves DLT proof of concept for the strict selling of scriptless government savings bonds. The saving bonds are to help improve the operation and efficiency for the new platform.

On the other side of the world, Venezuela introduced its digital currency known as Petro earlier this year. While many people call the new digital currency a scam, the president of Venezuela, President Nicolas Maduro is advocating making Petro the countries sovereign currency. Despite the countries turmoil, introducing a digital currency to the public will offer other countries a case study to help them when they decide to make the lead from fiat currencies to digital currencies.

Thailand and Venezuela aren’t the only countries interested in implementing cryptocurrencies. Central banks around the globe from places like Hong Kong, Singapore, Sweden, Canada, and Iran are studying how they too can create a state-issued digital currency in addition to their already existing financial system.

Benefits Of A Central Bank Digital Currency

For the most avid supporters of digital currencies like Bitcoin, the idea of having a central banking system goes against everything they believe. After all, Bitcoin was created as a means for people to ditch the banking system and allow them the freedom to handle their own financial affairs.

But according to central banks, they have compiled a list of benefits that far outweigh the drawbacks to central bank digital currencies (CBDC). Take the research performed by the Bank of Canada who estimates an increase of 0.64% consumption rate and 1.6% consumption rate for the United States if a CBDC would be established to handle transactions instead of cash.

An idea from Bank of Canada's Economist, Mohammad R. Davoodalhosseini states that utilizing a central bank digital currency would allow the government to track the flow of money on the blockchain which in turn would help reduce costs and needless spending. But to take full advantage of the CBDC, there would need to be a more efficient monetary policy in place.

Primary Benefits

1) The Ease Of Distributing Funds

The primary benefits of establishing a CBDC would be the ease of distribution and access. It is clear that people are more comfortable with allocating funds by digital means instead of having cash on hand. With a digital currency for the region, customers would be shifting funds from a digital wallet instead of a bank account.

2) Lower Transaction Fees

According to the RBZ report which concluded that by establishing a CBDC, transactions fees would be lower than what is already in place. Right now, Visa, MasterCard, Discover, and other credit institutions charge fees for every transaction that is processed through their payment systems. If a merchant offers digital currency as a method of payment, those fees the credit card companies charge would be moot.

3) Reduce The Dependency On US Dollar

There are still several countries around the world that depended highly on the United States Dollar, especially those countries dealing with oil. If countries like Iran introduced a sovereign central bank issued cryptocurrency, then they wouldn't have to rely so heavily on the USD.

Such a country that saw the benefits of implementing a sovereign digital currency was the Marshall Islands. Early this year the SOV was introduced as a legal tender which replaced the US dollar. Even though it still used the US dollar alongside its digital currency, the Marshall Islands have taken a step towards regaining their national liberty.

On the other hand, countries like Iran, that are not on friendly terms with the United States, yet still rely heavily on the US dollar could see a shift in their economy should they implement a sovereign digital currency. With the sanctions that weigh heavily on Iran, establishing a digital currency could circumvent the sanctions the US has put on them and allow them to thrive and prosper.

The Downside To CBDC

1) Costs For Setting Up The Program

Even though the benefit of establishing a central bank digital currency is enticing, there are the costs that are involved when overhauling the current financial system. A country would have to implement entirely new money that is operated on new technology. This would have to start from the top of the chain and trickle down to the people. Setting up such a project costs money, and for countries that are already struggling to make ends meet, finding the funds to start such a project is a considerable drawback.

2) Scalability Issues

Everyone in the cryptocurrency world understands that scalability is a significant issue that needs to be overcome. Right now, there is not a system or program large enough to handle the number of transactions that would take place in real time. The blockchain technology that needs to be in place for a broad scale project like a Central Bank Digital currency doesn't exist. Even now, cryptocurrencies are struggling to keep up with companies like Visa and MasterCard who process transactions in a matter of seconds.

3) The Potential Loss Of Privacy

Should a country establish a sovereign digital currency, the names and amounts that are listed on the blockchain would be made public for all to see. That means that for Jerry who just bought a new house with his currency, his mailman Eddie would be able to see that information when he purchased a bag of dog food. By creating a CBDC, privacy for the citizens of the country would go out the window.

The dark side of a CBDC would allow oppressive governments to track financial transactions of its oppositions. This would include citizens as well as politicians that are deemed too conservative or too liberal.

Central Bank Digital Currency CBDC Conclusion

It is this darker side of a central bank digital currency that frightens most people. While the benefit of having a CBDC does outweigh the drawbacks, privacy is a significant issue that needs to be dealt with before anything can be done to create a successful platform.

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