Forecast: Will Central Bank Digital Currencies Become the Future of Money?

[RazvanPaun]

Banking is an indispensable commodity.

It allows us to safely store our money, make payments and borrow money for outsized financial commitments. Bearing this in mind, the advantages of banks reside in deposits security, the convenience of making payments and the flexibility of borrowing money.

What if the security of our deposits is not guaranteed?

As of 2014, only 112 countries, representing 59% of countries surveyed, had explicit deposit insurance schemes pledging to compensate customers for lost deposits due to bank insolvency. This represents a sharp increase from 84 countries (44%) in 2003. Despite this progress, the prospect of deposit insurance remains questionable for many countries. In these countries, banks that go into liquidation deprive depositors of their funds. This puts the livelihoods of citizens at risk.

Entrusting our money with a private digital currency issuer (e.g. stable coins issuers) represents an even riskier solution. How do private issuers manage transaction data? Do they effectively risk-manage fluctuations in collateralised assets? Do consumers realise that there are no safety nets to safeguard their assets if it comes to worst?

Many of these private digital currency issuers say they want to reach the 1.7 billion unbanked. Nevertheless, is this not the responsibility of central banks around the world?

Central Bank Digital Currencies (CBDC): A viable alternative?

What Is Retail Central Bank Digital Currency?

Over the past two decades, the emergence of Internet-based products and services led to a paradigm shift with the world’s transactions moving into a digitally connected economy. Companies like PayPal, Stripe, Ant Financial, and Revolut have emerged as industry leaders, benefiting from this shift to online and digital commerce.

On the backdrop of innovations like blockchain and stablecoin technologies, central banks came up with the idea of creating a digital form of cash as an alternative to private digital currencies. This is what we call Central Bank Digital Currencies.

• A CBDC would be a new form of central bank money, issued and controlled by the central bank. The CBDC supply is determined by monetary policy and controlled by the central bank.
• A CBDC must be accepted as a means of payment and a safe store of value by all citizens, enterprises, and government agencies.
• A CBDC is distributed at one-to-one parity with relevant fiat by the central bank and should be seamlessly and freely convertible against cash.
• Consumers should not need a bank account to obtain and use a CBDC.
• The cost of a transaction should be lower than current systems.
• Because CBDC is provided directly by the central bank as opposed to an intermediary (i.e. a retail bank), deposits are not under threat of 3rd party risk.

“According to the Bank of International Settlements, over 80% of central banks are looking at issuing a digital currency on a blockchain.”

Taking a case study approach, Bahamas gave residents easier access to financial services in light of economic difficulties following damages of Hurricane Dorin on the financial infrastructure. Hence, they enabled the public to use the CBDC wallet without any bank account and without asking for any user identification for small amounts.

Some questions to get the discussion rolling:

Do you believe that using CBDC can increase financial inclusion?

How much time will it take for the global financial infrastructure to shift to digital? Why?

Will the implementation of CBDC stifle or nurture the emergence of digital currencies?

Can the implementation of CBDC reduce tax evasion and money laundering?

What happens if central banks do not go digital?

[KarenM]

Thank you for this topic @RazvanPaun!
I don’t know a whole lot about CBDC but I am learning and I believe I will learn more here. I do believe CBDC will increase financial inclusion because it has the potential to be global. I think this will take time, like everything else. Once a few larger countries implement it, (US, China) others will follow. Here in the US, ‘digital currency’ is still fairly unknown, though there are celebrities talking/singing about it so, believe it or not, that will help!
The implementation of CBDC can only help nurture the emergence of digital currency, in my opinion, because once it goes mainstream more people will get comfortable with it and feel it is “safe to use”. The US is considering issuing CoVid pandemic stimulus money this way. If that happens…that will go a long way in helping people become familiar with it and trust it enough to want it and use it.
I’m not sure about the money laundering and tax evasion question. I think matter what, there are people in the world who are dishonest and will try to cheat/beat the system.

[Pab888]

It is very wide topic .It always depend how it will be done.Dream about can be if bitcoin decentralized model will be used.Your private key is your money.Golden rule
II think first we need to look our own countries.What central bank is in our country
Are we trust our central bank are we trust our authorities even if yes do we have any guarantee that it will not change and our trust will gone
Personally i have strong thinking that digital has only support and make better our life
we will not move to digital world because root of our existence is physical body that is our boundary and we have to protect our boundaries .Root of democracy and humanity is choice free will is base of our freedom if that will change we gonna begin to live in system a la Stalin Hitler Pol-Pot etc
But at the end all that Future of Money is kind of slogan to me
Just take a look how internet companies and even our own authorities are stealing our private data exchanging them etc and our own authorities are using collected private data against us
So ny kind of money or whatever has to correspond to our law .Law of our country and international law that law is saying that Right to privacy has to be respected
Privacy and right to privacy is basic and fundamental in any democratic country
If world will be owned by corporation then we will have corporation money and our life will end
Personally first step to lose our rights is ban cash.My pocket is my money my private key is my money

[Al_Wallace]

Great topic Razvan. Thanks for the share.

Last time I suggested in this forum that a government-backed DC could have a negative impact on current digital assets I was shooed away like a heathen but here goes anyway.

I have always had this concern about existing digital currencies - I do believe that the emergence of CBDC’s will have a massive effect on existing digital currencies. After all, bearing in mind that all the individual aspects the make up a digital currency are simply a matter of programming, I don’t see why a government-backed digital currency couldn’t create something that was scalable, immutable and offered fast transaction speeds across the globe.

Could that kill off Bitcoin? possibly not, but I do think it might make it more of a speculative asset class as the likelihood of it ever then having a real-world use case would be slim with the possible exception of any activities where people wanted to avoid the authorities due to legalities, tax avoidance etc. I do believe some of the more popular digital assets might still trade on exchanges in much the same way they do now but probably only a handful.

The idea that a CBDC could be tied to fiat currency somehow is interesting and not something I had considered in the past but, if they could make it somehow work, that people could still literally carry cash but it was somehow immutably tied to the digital counterpart…I am nowhere near technically minded enough to figure out exactly if that would be possible or not though. It would certainly alleviate my major concern around the ‘banking for the unbanked’ concept that the digital asset heralds often sing about - that being that there are a great many people who have no access to the internet, or who wouldn’t understand how to use such a currency (I’m stereotypically thinking of elderly people here, but it could be anyone)

Again, on the negative side for this concept would be that not all governments are intrinsically trustworthy, nor are the central banks immune to corruption. What’s to stop a country from ‘printing money’ (some would argue pretty convincingly they already do in some or all cases) but then again there’s plenty of evidence to suggest that privately run digital currencies do the same. I think a CBDC would be an instant death knell for those kinds of companies, leaving us only with the truly decentralised, immutable coins. There would have to be some assurances in the creation of each individual central bank currency to make sure that there was full transparency globally as coins were ‘minted’ and perhaps even that we went back to the heady old days of asset-backed currency and I’m struggling to see how that could be achieved globally.

If I’m sounding not very clear whether I am for or against this as an idea then it’s for exactly the reason that I am not clear. I think we’d need to review the proposed product in more detail before I’d firmly sway one or other.

[Tradelta]

Hi guys. In this regard, here is the BIG NEWS of these week related also to this topic:

A short explanation of PayID (& XUMM)

I guess this PayID is really setting the stage for a new digital worldwide spread system of payments. The cool thing is that this is not only related to the crypto world but it goes to touch even the bank transfers via fiat money. HUGE NEWS INDEED!

Here more infos in this regard

Wietse's recent PayID, XUMM & XRPL FAQ's

[Pab888]

Example of government digital payment system can be digital yuan blockchain based
Everything look great.Fast very cheap transaction managed by AI But there is one thing.Digital Yuan AI will be in a hand of PBOC and biggest China banks
AI will be able to track any transaction instantly even tiny one.AI will be able to block reverse any transaction and suspend any account.Zero privacy and instant surveillance

[Eva]

Any transaction that cannot be controlled by authority is a threat to that authority and provides independence to individual in exercising their choices. So matter of currency is always a matter of politics.

Non physical currency (notes, written ledger, digital transactions as opposite to gold/physical assets) is much more amendable to being manipulated by politically driven authority.

Whether this manipulation is political control of individual via surveillance, currency value transfer via inflation, stabilisation of markets via “quantitative easing” or manipulation of exchange rates by central bank interest rates, they all offer central authorities power over the population they represent/must control.

So the current political direction towards the more authoritarian political regimes will translate, in my mind at least, towards: central bank digital currencies replacing cash, cryptocurrencies being made illegal or at least taxable as assets, any and all peer to peer trading platforms being very heaving regulated and policed.

Please note that my use of word “authority” is not limited to political elites. Any transnational corporation has authority in this context.

[RazvanPaun]

I think you’re raising some interesting points, Pawel. From what you mentioned, a few topics stick in my mind - privacy of personal data, the shift from physical to digital money and a perspective I find particularly insightful, namely the democratisation of money printing, which also touches on points raised by @Al_Wallace and @Eva.

From a behavioural point of view, instant gratification is the most in-demand ‘product’/‘service’ sought by consumers. We want to reach out to friends across the globe in an instant, we want social media feeds to be filled with an unlimited stream of tailored information. Corporations and governments are eager to fulfil these needs. For example, Facebook and other social media platforms capitalise on this trend by introducing scrolling mechanisms that work like slot machines. They are meant to be addictive. Where I am getting at is we willingly allow corporations/governments to gather our data and use it for different purposes. We offer consent by acknowledging their T&Cs. Most of us are willing to trade personal data on the features I mentioned above, among others, because they have developed an important role in our daily lives.

‘Instant gratification’ plays an equally important role in shaping the future of money. I find it is fair to assume that we are drifting towards a cashless society given the current state of affairs. The only hurdle in the transition towards digital money is finding a solution that prevents the decoupling of the unbanked from day-to-day social activities (this assumes that politicians wish to unlock synergies by furthering technological advancements). Solve for this and the prospect of becoming a cashless society is upon us. It is seamless and safe. Shifting to a cashless society would diminish illicit activities because digital cash lives trails. From a health perspective, living in densely populated areas creates perfect virus breeding grounds and physical money is a significant culprit. The pandemic is a strong case study in this regard. Above and beyond, it is easy to take out our phone and pay in a contactless fashion using NFC.

For the first time in history, money printing is no longer monopolised by national governments. Private (groups of) individuals and corporations now have the ability to mint tokens thanks to cracking the double-spending problem. Economic theory states that markets are more efficient where there’s competition. State-owned currencies are compelled to compete with the likes of Bitcoin, Ethereum and next-generation digital currencies, as well as corporate-backed tokens like Libra (if the project ever takes off). The ensuing competition may see a convergence between government-backed currencies and digital ones (i.e. crypto), hence taking the form of CBDCs.

Is this a fair assumption to make? If the answer is yes, what would be the competitive advantage of CBDC vs emerging digital currencies from the private sphere?

[Tradelta]

In my opinion there is another point to take into consideration.

What are the purposes of a Bank?

• to keep your money in your accounts in the most safe way as possible.

• to land you money if needed at the lowest rates IF possibible.

• I wanted to write another one but now it slided out my mind what the heck!!

In any case…with digital currencies I think that we can make all this activities that NOW we have to make trough the Bank as intermediary.
Safety for our accounts, transparent transaction (maybe was this that third point) and if we need take loans at lowest rates. PLUS with digital currencies AT THIS POINT OF TIME there is also the possibility to gain higher interests just by putting money aside in digital currency than keeping it into a bank account.

[RazvanPaun]

I think that the role of banks is to store and keep money deposits safe as well as allow people to access credit - to the extent that each person’s credit score allows. When comparing traditional banking services with digital currencies (i.e. crypto) I would say that the rate of adoption is based on the reliability and reputation of the infrastructure. Once the main exchanges and decentralised finance (DeFi) service providers come on top, both keeping deposits and investing in digital currencies will proliferate, eating away the clientele of traditional banks. Once the unsubstantiated bad reputation surrounding the digital currencies and blockchain environment comes to pass, results will be quick to follow.

For example, Binance recently released the Binance USD (BUSD) stable coin (a currency pegged to the dollar by default through colateral). It is safe to say that Binance is a reliable entity and more people will transition to holding stable coins like BUSD as opposed to the USD. Why? Because the ecosystem cannot be matched in terms of versatility by traditional banks, boasting services such as saving, staking, loans and P2P, among others, that are inherently customer-first services, and the list goes on. Having said this, I would argue against the point that banks’ purpose is to provide capital at low rates. The average bank attempts to game customers, especially financially illiterate ones, into committing to nerve-wrecking financial burdens instead of helping them achieve their financial goals.

Under these circumstances, if banks feel challenged by fintech, well, they ought to look ahead and see the biggest wave of disruption that is yet to come - the digital currencies and blockchain ecosystem.

Sure, this is all good and well, but what I just said doesn’t account for the emergence of Central Bank Digital Currencies (CBDC). As I highlighted in the topic, the issuance of CBDC would generally entail every person having a wallet that is not managed by any 3rd party (i.e. retail banks). What will the role of retail banks be under these circumstances over the medium to long term? People do not seem to be talking enough about this.

I wouldn’t exclude a scenario where central banks would hold deposits in digital currencies just to give customers access to yields and remain competitive in the process. Would that transform banks into exchanges/hybrid money managers with a limited mandate? Wouldn’t that expose the money deposits of the average Joe to unwanted risk? We don’t know what’s next.

I believe that possibilities are unlimited at this stage. The next few years should show us the route retail banks choose to take which will define their level of competitiveness in the market and, consequently, their survival. The alternative to survival would be consolidation.

[mosigman]

Maybe not completely related to some of the ideas shared here about the CBDC concept, but I think it’s an interesting note in relation to the pushback we may expect from these trends of financial inclusion/independence

Pentagon Documents Reveal The U.S. Has Planned For A Bitcoin Rebellion

[stackem]

This is a great topic @RazvanPaun, I’m a bit late falling into it

@RazvanPaun

Do you believe that using CBDC can increase financial inclusion?

Depending on the implementation, I’d say yes if as it’s expected, there will be no KYC or AML restrictions on low value transactions.
So if for whatever reason your left out of the current financial network, you’d have at least the means to transact across any future networks remotely. Essential for paying bills online, saving, investing etc.
This is though, with the caveat that you’d be allowed this “privilege”.

@RazvanPaun

How much time will it take for the global financial infrastructure to shift to digital? Why?

The rate at which the World’s Central Banks are pushing for this, I’d guess within a decade.

Globally speaking, SWIFT is out dated and inefficient. Digital cross-border remittances based on some block-chain technology is just about certain I’d say.

@RazvanPaun

Will the implementation of CBDC stifle or nurture the emergence of digital currencies?

I think on balance it’d probably not affect the emergence of other digital currencies that operate within their own eco-system at all.

Currencies that are solely cross-border orientated (yes, it’s you I’m talking about XRP ) would find conflict I guess.
.
Libra won’t be affected as much as many believe (or at least, want to believe ) on part because of Libras’ ability to leverage the massive user base it influences.

Thinking about it, uncensorable currencies would prove to be extremely sought after as a means to counter any (currently unknown or unfeasible) threat that people perceive coming from their governments.

What do I mean by this, well for example in the near future a government may opt to freeze the entire monetary system in times of crisis. This would effectively “lock out” it’s citizens from spending out from their accounts to buy gold, silver or bitcoin etc to edge against state currencies or proclamations such as the haircuts citizens endured on their bank balances during the Cyprus crisis in 2012
Keeping a portion of your wealth in alternative hard money digital currencies would make lots of sense.

@RazvanPaun

Can the implementation of CBDC reduce tax evasion and money laundering?

Yes, I think this would definitely reduce Tax Evasion for normal citizens (hell, that’s one of the top reasons governments are so keen for CBDC )
There’d be no more… pssst, pay us cash and we’ll knock a few quid off the job guv’nor.
As for money laundering, well that’ll just get more elaborate and ingenious. Coercion is a prime mover, either through the carrot or the stick.

In essence CBDC will I think, in whatever form they arrive in a particular jurisdiction either account based or token based, arrive in the very near future.

Other than the total control governments could harness in monetary policies,or the benefit for states to scrutinise all citizens actions and whereabouts for possible recriminating actions (see China now, maybe this wouldn’t be just confined to that country?), CBDC’s will also cost a lot less than the printing,supply and control that cash currently charges. Typically it costs governments about 0.5% of GDP, in the UK that’s around 11 billion.

There might be a little confusion as to what CBDC’s are. They are not cryptocurrencies, they don’t run on permissionless blockchains, they aren’t backed by anything other than a governments promise (yeah, copper bottomed that ).

Central Bank Digital Currencies aren’t backed by FIAT, they are FIAT. The currency will still be a FIAT currency, only purely digital. Governments can and will inflate the supply just as they can now, in fact in Central bank terms, they already supply and exchange digitally, there’s no real difference in that regard.

Crucially, CBDCs’ could also give governments the ability to design independent payments systems that operate separate from the US dollar-based order.
I think this is probably the main reason governments from all around the world are looking to impliment CBDC technology, the rest is just icing on the cake for them.

[predictor]

Agree with basically everything you have said @stackem

What I would like to add is that central banks aren’t necessarily making digital currencies to compete with bitcoin and others, they are just updating money to something modern.
Money is already used a lot in digital form, like when we pay with cards.

If people accept digital assets as means of payment they will absoulutely need to have both paper and digital money to stay in step with time. That wouldn’t change much for them, it probably easier to have it all digital but maybe it’s harder for them to make some manipulations when everything is recorded (I don’t even doubt they have some plans for overcoming that)
But as it looks like, cbdc will be here sooner than some people think, even before most people accept fully digital money as normal mean of payment.