The world has come a long way from transacting with commodities through barter trade and eventually money. Payment systems have progressed over the centuries, and with the current trends in the financial systems, there is still more coming. Thanks to the internet, things have rapidly advanced to a point where gamers, for instance, can play Vegas slots online at the comfort of their homes rather than traveling all the way to Sin City. Such evolution has been facilitated by the availability of online payment options, which have in turn opened up the possibility of mainstream transition to digital currency.
Traditionally, governments have defined what currencies to use in their jurisdictions, how much should be in circulation and the value of such monetary units. State-backed fiat currency has always existed in coin or paper form, and respective central banks have always regulated its supply and demand. To keep the monetary value stable, a government’s currency is usually subject to a complex legal framework that dates back centuries.
With the recent shift to digital currencies, central banks worldwide are considering switching from physical fiat currency to digital fiat currencies, now commonly referred to as Central Bank Digital Currencies (CBDCs). In case you were wondering, the difference between government-backed digital currencies and cryptocurrencies is that CBDCs are issued and controlled by a central authority (i.e., the respective central banks). As we speak, some of the countries that are already planning to start issuing CBDCs include:
China’s interest in developing a sovereign digital currency began way back in 2014. The country even set up a research lab in 2017 to help develop its CBDC. By August 14th, 2020, the People’s Bank of China had already begun testing the Digital Currency Electronic Payment (DCEP) in China’s 4 main regions. By the beginning of 2021, the total transactions completed in 7 cities that were part of the pilot totaled over $23 million. These transactions were made in more than 54,000 businesses in different industries, including transport, agriculture, retail and e-commerce, entertainment, and even the education sector.
With the current digital Yuan pilot project and recent push to lead in proposing a way forward in the standardization of CBDCs, it appears that they will be the pioneer of government-issued digital currencies in the world. The other difference is that CBDCs will have the same monetary value as the corresponding banknote currency of the issuing government. So, 1 digital American dollar will be equivalent to 1 fiat dollar, 10 digital Chinese yuan will be valued at 10 physical yuan, and so on.
Sweden has been at the forefront of introducing a digital currency of its own to the economy. The e-Krona, a CBDC that uses blockchain technology like cryptocurrencies, is expected to be ready for launch by the end of November 2022. The country’s usage of cash currency has been significantly dropping over the years, and it hit an ultimate low following the Covid 19 pandemic outbreak. With less than 10% of payments being made with cash, it would follow that the next logical step for the country’s economy would be to embrace a cashless system. The current debate around the e-Krona is whether introducing a CBDC should be a political one.
The UAE has recently announced a plan to launch its own CBDC by 2026 in a bid to establish itself as a hub for digital transformation. The government intends to take advantage of the latest emerging technologies like Big Data, AI and blockchain in developing their first digital currency. The Central Bank of UAE (CBUAE) has been running some tests on a cross-border digital currency called the ‘Aber’ in partnership with the Saudi Central Bank (SAMA).
The Bank of England has also been holding discussions on launching a CBDC to be used alongside cash and bank deposits. In April 2021, a CBDC task force chaired by the UK Deputy Governor for Financial Stability was launched to look into the idea of adopting a UK CBDC. In all this, the main concern by the UK government is that the country remains at the top of global innovation. A CBDC Engagement Forum and a CBDC Technology Forum have also been established to engage relevant stakeholders on all aspects of the CBDC.
What the Future Holds
It’s important to note that even the European Central Bank (ECB) is also working on a 2-year project to develop a digital Euro that will complement the Euro currently used in 19 countries in the Eurozone. ECB President Christine Lagarde stated that central bank money is the safest form of money and, therefore, the need to develop a digital version that will still be as reliable as the fiat currency. As of 2020, about 60% of the world’s central banks reported that they were exploring the idea of adopting CBDCs into their economies and had begun running tests on the same.
The subject of digital currency has been marred with skepticism for years, but thanks to reputable investors putting billions of dollars into Bitcoin and other cryptocurrencies, all that is rapidly changing. Once considered a volatile currency, digital currencies have recently gained credibility. In addition, CBDCs will save governments from incurring the cost of minting and producing new physical currencies. If any, the cost of transacting with digital currencies is also close to zero and will tremendously cut costs for citizens while providing a faster way to exchange currency.