A Guide to CBDCs
CBDCs, or central bank digital currencies, are on the rise, with nine already launched and more than 60 in development. But what are these new forms of bank-backed digital money? And how might they affect you?
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Driven by the rise of crypto, CBDCs are being heralded by some governments as a safe, stable form of digital money. But there’s still a long way to go before they become an accepted form of day-to-day public money, and questions remain over their safety, ethics, and integrity.
To help get you up to speed on CBDCs, we’ve put together this essential resource. Covering what they are, why they’re needed, and their risks and advantages, our guide is the perfect introduction for anyone looking to learn more about how central bank digital currencies could affect their money in the future.
Use the links below to navigate or read on the for the full guide.
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What Are CBDCs?
CBDCs are central bank- and government-backed digital currencies that are designed to offer a safer alternative to cryptocurrency. They aim to bring the advantages associated with crypto to a wider public, ensuring that fiatcurrencies aren’t outstripped by rapidly emerging digital private challengers.
While CBDCs can generally be compared with cryptocurrencies like Bitcoin, there are distinct differences. For one, crypto relies on a decentralized database known as blockchain. While early CBDCs utilize similar technology, the central banks that control them manage the blockchain themselves, making them a private and not decentralized form of currency exchange.
Up until now, the development of CBDCs has been slow, with only a handful of countries moving forward with the initiative into its advanced stages. But with major financial players like China among the early adopters of CBDCs, it won’t be long before we see other digital currencies emerging in developed countries around the world.
It’s a similar case in other Western nations too. In the US, the Federal Reserve is currently exploring the costs, benefits, and limitations of CBDCs, with a view to publishing its findings in the near future, and the UK’s ‘Britcoin’ is currently being explored by the Bank of England.
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Why Are Governments Looking to Develop CBDCs?
So, exactly why are world governments looking to develop CBDCs?
The move comes in response to two major global challenges, the first of which being the astronomic rise of crypto. While the development and take-up of cryptocurrencies was initially slow, investment has risen dramatically over the past two or so years, as a growing number of people look to buy into digital money (still only 23% of Americans and 6% of Brits own crypto, but this is growing yoy).
The rise and rise of crypto presents several challenges to governments and central banks. Chiefly, they’re concerned that digital currencies could begin to outstrip regulatory powers, and thus elude government oversight.
What’s more, there are geopolitical factors to consider. As the devastating war continues to play out in Ukraine and the world looks to find its feet in the wake of the COVID-19 pandemic, governments are looking to shore up their respective economies and put money into initiatives that provide better protection in times of financial uncertainty.
As well as these overarching considerations, governments and central banks are also seeking to maintain protections for consumers and businesses. There are concerns that unregulated digital currencies could ultimately threaten financial stability, harming the welfare of individuals and enterprises in the long term. The introduction of CBDCs is seen as a means of embracing cryptocurrencies without potentially harmful effects.
What Are the Advantages of CBDCs?
When it comes to a viable means of competing with digital currencies and crypto, CBDCs may be the solution that central banks have been looking for. In early versions of the technology, which include China’s e-yuan and the Bahamas’ Sand Dollar, several advantages have been identified which could ultimately help the technology to proliferate on a global scale.
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Let’s take a closer look at the benefits of CBDCs below.
It’s hoped that the introduction of CBDCs could help to reinvigorate and bolster the crypto ecosystem, leading to greater competition, innovation, and growth. The benefits of this would spill over into other areas, not least the technology sector, helping to generate economic growth.
Like other blockchain-enabled currencies, CBDCs can provide streamlined and rapid payments and settlement, as well as efficient overseas payments. Because they lack intermediaries, they support fast, liquid payments and transfers – which is one of the key reasons why cryptocurrencies have proven so popular. That said, it’s worth remembering that crypto transactions can be quite slow and expensive, depending on the blockchain and currency.
As countries around the world continue to move towards a ‘cashless society’ status, CBDCs present a secure, fast, and efficient alternative to traditional card payments. For governments seeking faster progress towards the phasing out of coins and notes, central bank-backed digital currencies have a role to play in post-cash economies.
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What Are the Risks of CBDCs?
Of course, CBDCs aren’t without their risks, which is why nations like the US and UK are making such a thorough job of vetting their viability. Among the risks associated with CBDCs are:
Currently, CBDCs have a major geographical flaw, in that they’re only accepted in their country of origin. This could prove a barrier to their long-term functionality and uses, unless a solution is put in place.
Some experts fear that CBDCs could lead to major bank runs, in which lots of customers withdraw money at a similar time. The impact of this can drive banks into insolvency, meaning reduced competition and the threat of central bank buyouts, which can put a squeeze on the public purse.
In some instances, there have been debates about the ethics of CBDCs, with concerns that central banks could gain too much control over consumer spending. Some experts argue that CBDCs are essentially programmable currencies, which erode free choice and consumer rights.
There’s also the issue of inclusion, with concerns about how well older generations will access CBDCs if they become a mainstream currency option. For example, how easy will it be to access CBDC technology on older devices? And, some may ask, is it really fair to expect old or vulnerable people to access their money through ‘digital wallets’?
A further worry concerns privacy. Would a CBDC give a government easier or greater access to individuals’ data? This is a major concern about China’s e-yuan for instance; it gives central government tremendous surveillance possibilities.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
To learn more, visit our homepage or give us a call at +44(0)203 915 8111.
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