The idea of a digital currency has been around for many years. However, it wasnít until the rise of cryptocurrency – a potential threat to central banks – that a privatized or decentralized digital currency may exist and replace the need for centrally-controlled fiat.
Recently, Plus500 US, among other brokerage firms, has started to offer the option to trade cryptocurrency Futures, as well. Whilst the initial white papers of most currencies often set out to be utilitarian – usually a means of transactions – they quickly become subject to speculative investments, causing volatility and often huge gains and losses.
G7 Discusses digital currency
The G7 has recently brought up the issue of cryptocurrency regulation. And, in the same conversation, has begun discussions surrounding digital currency standards. The consensus was in favor of stronger regulation on cryptocurrencies. Whilst many regulators have been battling over whether they should be classified as a security, or traditional investment (because many are treating them this way, even if itís no the intention of the founders), itís actually the crypto exchanges that are getting the most heat.
Since the collapse of FTX last year, Masato Kanda, a top currency diplomat of Japan, claimed it was “a serious wake-up call” and that “For crypto assets, there are a bit of diverging views among countries. But consensus is definitely that we need more regulation, particularly after the FTX shock.”
The meeting was to discuss how developing nations could introduce central bank digital currencies that are consistent with international standards. However, this is perhaps a sign of overconfidence given that there is yet not evidence of a fully-fledged, safe central bank digital currency.
The Case for CBDCs
- Increased efficiency and lower costs: The adoption of CBDCs could lead to more efficient payment systems, potentially reducing transaction costs and processing times. This could be particularly beneficial for cross-border transactions, where multiple intermediaries are often involved, resulting in higher costs and longer delays.
- Financial inclusion: CBDCs could provide access to financial services for those who are currently unbanked or underbanked, especially in developing countries. With a digital currency in place, individuals without access to traditional banking services could participate in the digital economy, potentially reducing poverty and fostering economic growth. It also reduces dependency on banks at a time when a banking crisis is close to occurring.
- Enhanced monetary policy tools: Central banks could use CBDCs to implement more effective monetary policy measures – their impacts could be realized more quickly. By having a direct channel to consumers, central banks could potentially control interest rates more effectively, allowing them to better manage economic fluctuations.
- Increased control over illegal activities: A centralized digital currency could potentially help regulators track and prevent illegal activities such as money laundering and terrorist financing. By monitoring transactions, central banks and authorities could detect suspicious activities and take action to protect the financial system.
The Case Against CBDCs
- Privacy concerns: The main hesitancy that the public has over CBDCs is the issue of transparency and traceability of transactions. This could lead to potential surveillance and misuse of data by governments or other third parties.†
- Cybersecurity risks: The digital nature of CBDCs exposes them to cybersecurity risks such as hacking, fraud, and data breaches. Ensuring the security and stability of a digital currency infrastructure would require robust and resilient systems, which could be expensive to develop and maintain.
- Disintermediation of banks: CBDCs could potentially reduce the role of commercial banks in the financial system, leading to disintermediation. This could weaken the banking sector and limit the availability of credit to businesses and consumers.
- Economic instability: The introduction of CBDCs could lead to destabilizing effects on the economy, such as bank runs or large-scale shifts of funds between traditional and digital currencies. Central banks would need to carefully manage the introduction and adoption of CBDCs to mitigate potential risks.
Bank of England assigns a 30-strong team for a digital currency
Another recent development in 2023 has been the Bank of Englandís plans to hire 30 people for a ĎBritcoiní centralized digital currency. A 30-strong team has raised eyebrows, as itís a significantly large amount of resources to dedicate towards it.
Each year it seems the BoE steps up its plans for R&D into the notion of a digital currency, making it one of the most likely Western countries to take the first leap.†
This could pose a huge threat to the UK economy, given it is so heavily dependent on Londonís financial center.
Whilst there isnít yet a consensus on how to regulate crypto, the reaction from central banks has been to push for the idea of a central bank digital currency, which is even further away from decentralization than where we are today.
Stay updated with all the insights.
Navigate news, 1 email day.
Subscribe to Qrius