Not All Central Banks Show Interest in CBDCs

The recent survey conducted by the Bank of International Settlements shows bullish and bearish sentiments regarding central bank digital currencies (CBDCs). While banks in Emerging Market Economies (EME) are taking active steps towards CBDCs adoption, those in established countries remain more cautious on the transition from fiat to digital currencies.

Ironically, banks which can propagate digital currency adoption are the ones which are the least likely to be the first to embrace it. What are the reasons behind their reluctance to move quicker?

1.6 billion people could have access to CBDCs in the next three years

This is the most surprising finding of the study, which was titled “Impending arrival — a sequel to the survey on central bank digital currency.” Respondents of the survey encompassed 66 banks representing 75% of the world’s population and 90% of its economic output. 10% of the banks stated that they were planning to introduce their general purpose CBDCs in the next three years, representing 20% of the world’s population.

This indicates that digital currencies, although centralized, are capable of achieving almost instant mass adoption which the creators of cryptocurrencies and stablecoins have been working toward for the past 10 years.

Himanshu Yadav, the co-founder and managing partner of Woodstock Fund, a multi-asset investment fund, explained: “As CBDCs are rolled out, more and more people will want to understand what a digital currency is.” He added:

“Some will ignore them, and some will explore them further, leading to a net positive gain in the cryptocurrency ecosystem. Developers will build tools that will allow for seamless exchange between CBDCs and cryptocurrencies, and the race for digital currency supremacy will take center stage in this decade.”

Most of the CBDCs will be launched in emerging market economies

This perfectly suits EMEs, which have troubles with payment efficiencies, safety, financial inclusion and other issues. Launching a CBDC could reduce or even eradicate some of these system inefficiencies which hinder global expansion of EME’s markets.

Nataly Simson, the chief operating officer of Coinsbit.io, Estonia-based cryptocurrency exchange, outlined what the new and large potential user base may bring to cryptocurrency:

“By increasing the number of users utilizing blockchain technology, industries will need to adapt to support these currencies for everyday purchases, not only trading. New marketplaces can grow in the underdeveloped countries that are considering CBDC implementations and is why our marketplace connects directly to Amazon and eBay, to empower acceptance and use of CBDCs and cryptocurrency. More consumers benefit the entire cryptocurrency ecosystem when unlocked.”

Cash increases, but its use for payments is decreasing

This trend shown by the banks allows us to analyze how consumers use money. Cash is being used to store value, not for payments. The movement toward a cashless society continues to advance with people choosing alternative forms of payment. The CEO of Element Zero, Jude Regev, said that “brands issuing forked CBDCs may receive greater adoption than asset-backed government currencies.”

As consumers get used to digital means of value exchange, the transition to CBDCs is inevitable. When talking about the possible impact of CBDCs on cryptocurrencies, Monica Singer, the South Africa lead for Consensys, an Ethereum-focused innovation firm, said:

“Once users are aware how easy CBDCs are to use, they will be keen to invest and experiment with cryptocurrencies. Cryptocurrencies will in the future be used as a store of value, in particular, those that are collateralized and where the governance is understood and properly risk-managed.”

Dr. Wulf Kaal, professor of law at the University of St. Thomas School of Law, stated that he also thinks that cryptocurrencies may benefit from wide CBDC adoption:

“Bitcoin benefits from the increasing adoption of CBDC, as it will be considered as a staple and default investment in digital assets. The degree of benefit for Bitcoin, again, depends on the ability to convert CBDC into Bitcoin and vice versa.”

Despite this, decentralized tokens’ use is still low. Consistent with the results of the 2018 survey, the banks reported no notable change in the use of cryptocurrencies for payments, but 60% noted that they are “considering” the influence of stablecoins on existing monetary systems. Many of these banks are investigating possible risks to their businesses which may be brought about by stablecoins if they become popular.

Banks in advanced economies are more confident in their existing institutional systems

Analyzing the survey responses from the central banks, we can note that some do pay attention to the value blockchain presents to their existing systems used to manage currency transfer and issuance. Launching a general purpose CBDC was motivated by financial stability, payment efficiency and safety, but financial inclusion was not the top priority.

This shows that these banks are confident about the services they offer to individuals and businesses. As one of the initial premises of Bitcoin (BTC) was to provide a means for people from all walks of life to exchange assets in a peer-to-peer system, a CBDC may not be necessary or desirable for such economies, at least now. Speaking about the reluctance of established economies to launch CBDCs, Justin Newton, CEO and co-founder of Netki, a KYC and AML provider, explained:

“Current fiat-to-crypto exchanges are like the modems of the internet days. They provide a critical bridge between the legacy world and the new digital world as adoption grows. In the case of the internet, it wasn’t really until the advent of DSL and cable modems — and then fiber — that we saw the ubiquitous uses of it that we have today. Similarly, CDBCs are always on, always available digital versions of their older, analog counterparts. With their availability, it will make it easier for people to move in and out of truly open and permissionless networks.”

Advanced economies are cautious about CBDCs

Responding banks may be holding back on their plans to launch CBDCs, since their nature is very competitive. However, many of these banks stated that they will proceed with investigating digital currencies and the feasibility of introducing their own.

While central banks are pursuing their own digital currencies, central banks in advanced economies may see less of a need in fundamental changes. Svet Sedov, the founder of SvetRating, a decentralized due-diligence platform, explained:

“It’s difficult to imagine why any central bank would want to design a currency, which won’t be a subject of direct [governmental] control. Therefore, it’s difficult to predict what future barriers for cryptocurrency’s mass adoption will be mounted by various government agencies across the world. Until recently, all those efforts have proved to be only marginally effective — slowing but not stopping the spread of crypto.”

Central banks have a leading role in the global economy, therefore any blockchain implementation may influence the system positively. While central banks in advanced economies will move forwards with caution, the power of blockchain technology will be recognized by government structures.