With China’s power move to expand their national digital currency pilot to major cities, global central banks are rushing to solve nuances of implementing CBDCs
The ongoing digital currency race took on a new speed as China’s central bank rolled out more of the eCNY’s testing across its major cities of Beijing, Shanghai and Shenzhen. With widespread move away from cash and continuous cryptocurrency surge, the nuances of implementing Central Bank Digital Currencies (CBDCs) are discussed by central banks around the world.
Overall, central banks have been cautious about implementing CBDC—the digital version of physical cash issued—due to the potential use of distributed ledger technology (DLT), such as blockchain. However the pandemic sped up the move towards contactless payments and implementation of digital fiat currencies as showcased by China and the Bahamas most recently. Although CBDC does not have to be blockchain based—it is a convenient option, considering it delivers the needed solution and already has a practical application.
“It’s true that blockchain has been called the most disruptive invention since the internet itself; after all, the technology was developed to move away from the centralised to a distributed network, often publicly accessible ledger system,” said Vytautas Zabulis, H-Finance CEO. “But with the pandemic—the move away from cash—might force central banks to reconsider the possibilities that blockchain technology can offer if they want to have a stronger presence in the digital world of finance.”
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Along with blockchain’s capabilities for facilitating token circulation, assignments and swaps or exchanges, it would also enable central bank money to enhance the needed control and security. Since CBDC sits on the token-based approach to money, this brings both innovation and advantages that cash cannot.
“Cash is really expensive to manage, handle and control—the estimated cost of clearing and settling securities for central banks in G7 countries is over $50 billion per year,” explained Mr. Zabulis. “Fully implemented blockchain-based CBDC would ensure a low cost—almost zero—and instant settlements available 24/7, along with the chance of money laundering, tax evasion and other financial crimes excluded. Money on the blockchain technology could be monitored and people’s balances could be seen by the authorities and the public, without disclosing the owner of the account.”
Central banks, however, are discussing several key policy concerns of the blockchain-based CBDC, including potential cut-out of the commercial banking sector.
“We have to understand that the role of commercial banks is, primarily, lending, and we cannot anticipate central banks to become lenders,” commented Mr. Zabulis. “In theory, yes, people would be able to open an account at a central bank and hold their money there; in this case, commercial banks would probably be able to access the accounts on some sort of private-public partnership. But the core logic of central banks is not to become lenders and to eliminate banks—it’s to create a new type of financial infrastructure, which would be way more efficient, almost costless and increase financial inclusion.”
The CBDC implementation might still be some time away, but the solutions for smooth and functional CBDC enactment already exist in blockchain technology, currently applied in the cryptocurrency ecosystem. If central banks want to be well-prepared for the shift to digital currencies, the blockchain technology seems to be the simplest choice.