Will central banks create their own digital currencies?

[Karl_BC]

In the past 11 years since the birth of Bitcoin, cryptocurrencies have gained immense momentum and popularity as they are decentralized and are rather free from regulation. This makes them a threat to central banks - defined on Investopedia as “a financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations”.

As central banks are unable to control the influence and growth of cryptocurrencies, the latest buzz revolves around them wanting to create their own digital currencies or cryptocurrencies. While some governments are contemplating about it, others have gone ahead to start working on it.

What is CBDC?

A central bank digital currency, or CBDC, is said to represent a country or a region’s official fiat currency in a digital form, through the use of digital tokens and blockchain technology. Whereas cryptocurrencies like Bitcoin and Ethereum are decentralized, a CBDC is centralized. This means that a country or region’s monetary institution will be regulating it.

Interestingly enough, according to the bank for International Settlements (BIS), the idea of CBDCs has been around before Bitcoin even started.
We’re talking more than 20 years!

Why do central banks want to create CBDCs?

The main reason is financial inclusion for everyone, especially those who are unbanked, such as those who live in rural areas who are unable to access banks or ATMs. CBDCs can be made available to anyone with a smartphone - similar to the availability of cryptocurrencies.

Another factor to look at for why central banks want to create their own digital currency is Facebook and its Libra token. While the Libra token isn’t released yet, Facebook’s announcement sent shockwaves amongst policy makers as they have 2.6 billion active users - all of whom could become Libra users. Compared to Bitcoin’s global adoption rate of less than 5%, the volume of Facebook’s user base sure is something that could create a big shift.

Opportunities and risks of CBDCs

With multiple countries around the world either contemplating or working on CBDCs, there have been various discussions about the opportunities and risks that it brings. The BIS recently worked with 7 major central banks around the world to create a report that outline the foundational principles and core features of CBDCs. The report was released on October 9, 2020.

In their summary presentation video on YouTube, the BIS shared the following key opportunities and risks of CBDCs:



CBDC VS Cryptocurrency

And just so you know, while the concept of CBDC may sound similar to cryptocurrency because they are both digital assets, CBDC actually goes against what cryptocurrency is all about.

* Centralized VS decentralized
CBDC is centralized while cryptocurrency is decentralized. CBDC will be regulated by a country or region’s monetary institution, also known as one central network. Cryptocurrency, on the other hand, is controlled by the many distributed nodes who gain rewards for maintaining the network.

* Privacy
Blockchain News shared that CBDC is said to possibly be less respectful of your privacy and data because “central banks are infused to regulatory bodies”. Compared to crypto where it’s peer-to-peer and you get to decide how much information you want to share, this is certainly something to consider as you don’t want to become a target for financial criminals.

* Security
While there are weaknesses in the blockchain, cryptocurrency has somewhat managed security concerns. CBDCs “are likely to be cyber-attacked by rival states who now have to contend with one centralized point of failure for financially motivated hackers to attack”, as reported by Blockchain News.

So… will central banks create their own digital currencies?

Right now, it seems like things are up in the air. Benoît Cœuré, Head of BIS Innovation Hub, has shared that while creating a CBDC is not decided yet, the report they did with the 7 major central banks -“Central bank digital currencies: foundational principles and core features” - is a major step forward.

Any CBDCs that are launched will be expected to keep to:

1. “Do no harm” - CBDCs should deliver monetary and financial stability and not hamper central banks in delivering on their mandates.
2. Co-exist with cash, bank notes and other types of money to enable a diverse, innovative and flexible financial ecosystem.
3. Encourage innovation and efficiency, including actively involving the private sector.

BIS and the world’s major central banks want to build on the excitement and commitment that is being seen around CBDCs right now. However, it has been noted that many policy dimensions and foundations need to be explored further before central banks release any CBDCs.


What are your thoughts about the central banks’ digital currency? Will it be a threat to Bitcoin or could it give Bitcoin a boost?


Regards,
Karl

[masterrex]

As we can see now that some Central Banks are already doing it, like China, they have the Digital Yaun while some others are also considering to make their own too, thats why I believe that sooner or later most countries Central Bank has already have it. CBDC is just a digital version of the countries local currency so clearly it was back by fiat and of course, it's centralized.

[Black ID]

I think that with the Digital Yuan project that China has created, it will soon be followed by other countries' Central Banks. Because this crypto is very fast spreading freely. So I am sure that soon there will be other projects such as Digital Yuan from various countries.

[trauchot]

Some central banks have already created their own cryptocurrencies, I don't know exactly for what purposes, but I think it was all for a reason, but in general all banks understand that cryptocurrencies are developing very quickly and most importantly successfully, and a lot of banks also want to develop in the cryptocurrency sphere, I think that gradually more and more different banks will create their own cryptocurrencies and this will help the cryptocurrency sphere to develop faster.

[Tnoy30]

Banks in each country will be able to create their own cryptocurrency. In most countries this is possible. Banks in many countries can do this. There are many more possibilities. As China Digital Yaun has already done. In the future, banks in most countries may intensify this. There are possibilities for the future. Soon we will see fiat in most countries. Digital yaun is a new invention in China. The idea is to help take cryptocurrency one step further.

[tervel]

Any blockchain or digital currency would be good for the industry overall. Most CBDCs are likely to be more restrictive initially but will evolve over time. CBDC that’s more open, more free, has less restrictions than Bitcoin, and is faster and cheaper to use, be  would threaten Bitcoin.

[edmundo]

There isn't any reason why they shouldn't but most Economies will see this as redundancy since they all still cling heavily on their Fiat and traditional banking and currency systems. Most will prefer to adopt the top cryptocurrencies already available in the market with most likely to adopt bitcoin for obvious reasons. However, the benefits and gains of owning their own cryptocurrency could be massive as they will control and regulate these cryptocurrencies if created and also decide how these cryptocurrencies get distributed, issued and utilized.

[Renampun]

actually, there is already a cryptocurrency created by Banks that is Ripple...
many Banks have said they will work with Ripple in the next few years. currently, the market capitalization of Ripple is very large so central Banks don't need to create new cryptocurrencies anymore.

[hushpupppy]

If central banks create their own tokens in the crypto currency sphere; it will only be used by government agencies, agents and parastatals. The blockchain and crypto currency is here for decentralization purposes; anything from the government is centralized.

This is one reason why the government has to only try and regulate and counter frauds; but leave the space decentralized.

[Noverteno]

actually, there is already a cryptocurrency created by Banks that is Ripple...
many Banks have said they will work with Ripple in the next few years. currently, the market capitalization of Ripple is very large so central Banks don't need to create new cryptocurrencies anymore.

The banks use the ripple network to organize fast and cheap transactions instead of the outdated SWIFT system.  This is a little different from having to have your own digitalized currency.  Now more than 80 percent of all states have already started working on the creation of national stable coins of central banks, because the benefits of their practical application are obvious.  Most likely, in the near future, almost all states will have their own digitized currencies.

[Fenix]

If central banks create their own tokens in the crypto currency sphere; it will only be used by government agencies, agents and parastatals. The blockchain and crypto currency is here for decentralization purposes; anything from the government is centralized.

This is one reason why the government has to only try and regulate and counter frauds; but leave the space decentralized.

Of course, almost all states will soon create their own national digitalized central bank currencies.  The advantages of digitized currencies over conventional ones are now obvious and beyond doubt.  Like the usual currency of states, their digital counterparts will be actively used by citizens of these states.  There is no doubt about that.

[UNIVERSE]

Aren't they currently aggressively creating CBDC? Or just a few countries? This is actually a good move. On the other hand, we can see how the world views cryptocurrency, becoming something that is easier. Personally, I will support it as long as there is a high increase in crypto enthusiasm because of this

[TomPluz]

State-backed digital money or simply called as CBDC are going to be getting more popular in the coming years and this will surely be supplementing (not yet totally replacing) the fiat money of any country having it. This is going to be mainly utilized in big country-to-country transactions and those in global commerce, with the assumptions that this can be kicking the use of USA Dollar which if will be the in thing can be so catastrophic to the economy of the USA as this can be time when the side effects of always printing money will be manifested with hyperinflation. USA has to be careful now because this will really happen.

[Alcor]

Some central banks have already created their own cryptocurrencies, I don't know exactly for what purposes, but I think it was all for a reason, but in general all banks understand that cryptocurrencies are developing very quickly and most importantly successfully, and a lot of banks also want to develop in the cryptocurrency sphere, I think that gradually more and more different banks will create their own cryptocurrencies and this will help the cryptocurrency sphere to develop faster.

Banks will not develop cryptocurrency. It is their own digitalized central bank currency that is ideal for them. It should dramatically improve the efficiency of conventional currencies, but the digitalized national currency is not a cryptocurrency. It often also works using blockchain technology, but it cannot be classified as a cryptocurrency due to completely different, non-decentralized principles of operation.
Therefore, states will create their own stable coins of central banks, but they will also fully regulate their circulation themselves.

[legend45]

yeah, I think central bank will create their own digital currencies.
Digital currency is the future currency, mnay people believed digital currency will come and will replace traditional technology and fiat money.