Representative image | Photo credit: iStock images
There is an undeniable buzz surrounding the central bank digital currency, or CBDC. The Bahamas became the first country to issue a CBDC last year. And on October 1, Nigeria’s central bank unveiled its e-Naira. Last year, China began testing its digital yuan in four cities. The United States and Britain are busy working on pilot programs and releasing research papers outlining how their own CBDCs might work. Still, many people are suspicious of the idea and confuse it with some form of cryptocurrency. They shouldn’t, and they don’t.
Which raises the obvious question: what is a CBDC? The simple answer is, CBDCs are like money in your wallet. Except that it is not printed – that is to say delivered – on paper. Rather, it is issued electronically. Like paper money, each CBDC has a serial number and is identifiable. In contrast, a Bitcoin is like a pot of gold and is therefore not uniquely identifiable. Owning a few Bitcoins is like amassing a few ounces of gold. Like gold, you can cut chunks to pay someone or accumulate chunks of Bitcoin into a crypto “chunk”. It is infinitely âmeltingâ, so to speak.
Now you might protest that it doesn’t look much different than digital payments with your credit card. Or electronic bank transfers. Well, it’s different. Digital payments are a form of checks: instructions for paying money from your account. This money is ultimately represented by physical money printed by a central bank – it may be represented digitally in your account, but there is a store for this physical money somewhere to back it up. Whenever you use electronic payment for your coffee, intermediaries match your payment to your bank account and then transfer it to Starbucks. You need Mastercard or Visa to be the middleman, a role they charge a fee for.
For the sake of simplicity, handing over digital yuan to Shenzhen (one of China’s test sites) for certain dumplings is like taking money out of your wallet. It goes directly from you to the seller. There are no middlemen, like with cryptocurrencies. But unlike cryptocurrencies, the unique identity of each CBDC means that it is possible to trace the route taken by each CBDC. There is an electronic record of every transaction, unlike traditional fiat money. This makes it more difficult to launder money or fund illegal activities without being detected.
But for all this, many people fear that their “real money” is being thrown into a Ponzi scheme that they think is cryptocurrency. Most people still don’t understand what a blockchain is and can’t understand how technology enables CBDCs and cryptocurrencies. Indeed, the fact that CBDCs depend on the blockchain just like cryptocurrencies makes them immediately suspect.
Indeed, cryptocurrencies and CBDCs are interchangeable terms in the minds of many people. And a problem with one tar the other. Consider El Salvador’s adoption of Bitcoin – not a CBDC, mind you – as the national currency in September. It didn’t go well. There was confusion among some residents, and international observers warned the country would isolate itself from the global economy (such is the fear of cryptocurrencies) and publicly questioned the true intentions of those in charge. the country.
In fact, the real problem was that a few days after El Salvador launched into Bitcoin, the hot new blockchain and cryptocurrency, Solana, suffered a 17-hour outage. Solana is a more efficient alternative to popular blockchains like Ethereum and is viewed by many who understand these things as the future of cryptocurrency. But then it dipped for more than a day, causing some to question the strength of its technology and see concerns spread to other cryptocurrencies and CBDCs.
Lost in the sea of ââshots about these two events is a fact most take for granted: We are in the very early stages of blockchain technology, cryptocurrencies, and CBDCs. This is not a value judgment on the use and effectiveness of blockchains or cryptocurrencies. Instead, it’s a humble reminder that we’re in the early days of deeply innovative technology.
At the dawn of the Internet, a virus called the Morris worm in 1988 infected up to 10% of computers connected to the Internet. Despite this crippling event, which opponents at the time cited as a potential drawback to the Internet as a whole, the Web has performed remarkably well. Instead of seeing the Solana outage as evidence of the inferiority of cryptocurrencies, it is more informative to view these developments as a natural part of emerging technology.
This brings us back to the CBDCs. Why bother if most people and banks are quite happy with today’s variety digital transactions? The answer is that the infrastructure for money is changing. We have had paper money since the Tang dynasty in China in the 7th century, although it didn’t really take off until the Song dynasty in the 11th century. Technology has accelerated over the past 100 years to the point where we need to re-evaluate the way we structure society, including money. There is clearly a need to keep abreast of technological improvements. Digital currencies work, reduce corruption, are easy to use, and are much easier to control.
Don’t take my word for it. This is what the IMF has repeatedly supported. In an article she published on her website in July, she said that the “benefits of [digital currenciesâ] the underlying technologies, including the potential for cheaper and more inclusive financial services, should not be overlooked. Governments, however, need to step up efforts to provide these services and leverage new forms of digital money while preserving stability, efficiency, equality and environmental sustainability.
The incentive for large central banks to establish digital currencies is about relevance in a changing technological landscape. Yet this shift to digital money won’t happen overnight, and there will be hiccups along the way. Just as the internet has experienced major growth challenges (and still is), digital currencies still have a long way to go to mature. It is still early. Yet instead of carrying cash in your wallet, you should expect to pay in the near future with an iris scan, a thumbprint, or your face shape.
In agreement with Syndication Bureau
Joseph Dana is a guest contributor. The opinions expressed are personal.