China seems to be leading the race to launch the world’s first major Central Bank Digital Currency (CBDC). The government held a lottery through the social media application ‘WeChat’ wherein a handful of people were selected to test out the new electronic Chinese Yuan (eCNY). Winners were given 200 eCNY which is the equivalent of $30 which they were then to spend at places like a convenience store.
The winners of the lottery stated that the experience was more or less the same as existing digital currency payment modes. The government has been developing the CBDC since 2014, much before any other country was even thinking about it. The aim is to have it ready for use nationwide in time for the 2022 Winter Olympics which are to be held in Beijing.
The Swedish Central Bank is one of the other major entities that has begun seriously testing the viability of CBDC. After initial results, it has found that it needs more time before it can be rolled out in a legitimate way. The Swedes have given themselves until 2026 to do so after initially claiming that the feat would be completed by 2022
There is interest all across the world in CBDCs. More than 60 countries have been working on their own version of a CBDC over the course of the last year, but to varying degrees. The US, for example, has merely done some basic research into the matter while others like China are almost ready to go. But how is a CBDC different from the existing forms of digital currency? And why is there a sudden interest in creating one?
Unlike cryptocurrencies, which are decentralised and based on blockchain technology, CBDCs will be completely centralised and will not be recorded on a distributed public ledger. Many advanced economies like Sweden and Norway rely heavily on digital payments as they have virtually become cashless societies. Governments understand that there are certain risks associated with relying on private payment systems and as such they believe that there is a need for a trusted official platform backed by the Central Bank. In creating a CBDC, governments are offering people an alternative currency to use in case something affects the functioning of these private platforms. In this way, economic activity remains unaffected.
Use of CBDCs also bring with them an increase in efficiency. Transactions will occur faster and will also be easier to keep a track of. This is one of the main reasons behind why the Chinese government has been so interested in developing a CBDC as increased data collection will enable officials to make smarter decisions regarding the Chinese economy. It will also be cheaper to issue digital currency than it is to print fresh notes or mint coins which will then bring with it a reduction in counterfeiting.
When it comes to situations like a pandemic, conducting direct cash transfers will become extraordinarily easy. The most vulnerable people in society can be helped a lot quicker with a CBDC in use. Poorer countries will be especially interested in this aspect of its utility as it will not just be in the case of an emergency where cash transfers might need to occur. It will also help bring a large number of the unbanked population into the equation.
One of the main reasons as to why observers think that governments are all of a sudden so interested in CBDCs has to do with the rise of cryptocurrencies. Cryptocurrencies like Bitcoin are decentralised and are by nature anti-authority. Having seen how popular these have been in recent years, especially during the pandemic, governments may have been a bit spooked. Cryptos challenge existing fiat currencies and are increasingly becoming an accepted means of payment in many parts of the world. Countries like India are trying to ban them entirely, citing reasons like illicit uses such as funding for terrorism. While this may be concern, the real motivation behind an attempted ban likely has more to do with struggle for centralisation.
CBDCs, as already mentioned, will be completely centralised with the central bank or the government having total control over their circulation. They come with all the benefits of convenience but with none of the other features that have made cryptos popular in the first place. CBDCs will have to offer a lot more to the consumer than the digital fiat currency that is already in use for people to make a switch towards them. It is still of course very early days in this space. Jerome Powell, chairman of the Fed in the US has stated that he’d rather ‘get it right than be the first’ when it comes to launching a CBDC. It is realistic to expect most major economies to have launched a CBDC over the next decade, however, as interest in doing is gaining rapid pace.