Is government-issued digital currency a threat to cryptocurrency? Although it is unlikely, stablecoin usage may be less. It seems that electronic currency issued by the government is a good idea.
stated that “more than half the world’s central bank are now developing digital currency or running concrete experiments on it,”. This is something that was unimaginable just a few years back.
According to a survey of 81 central banking institutions, the BIS found that nine of ten were actively exploring central bank digital currencies (or CBDCs) in some way.
Many were stunned by the rapid progress. Ross Buckley, KPMG KWM professor of disruptive innovation, at the University of New South Wales in Sydney, said that it was truly amazing that 90% of central banks were working on CBDCs. “The extraordinary year-on-year growth of this field is remarkable.”
Franklin Noll, president of Noll Historical Consulting, LLC, said that the most striking thing about advanced economies moving towards retail CBDCs was their speed. “Central banks in advanced economies had a relaxed view of CBDCs as they didn’t consider them necessary or worthy of much attention until the middle of last yea.”
The report noted that momentum accelerated in the last year. The report noted that Nigeria, which launched its electronic currency, the eNaira, in 2021, was following the lead of the Bahamas, who in 2020 introduced the world’s first retail CBDC, the Sand Dollar. The pilot versions for their digital currencies, DCash (Easter Caribbean) and e-CNY (China ), were released simultaneously by the China . The BIS stated that a record 90% of central banks participated in CBDC work in the survey.
The Bahamas struggles, Sweden deliberates, Chile delays
Although it may seem simple to implement a successful CBDC, it is not easy. Although the Bahamas’ digital currency has not gained traction, it accounts for less than 0.1%. The International Monetary Fund stated that the country’s new digital money is struggling to gain traction.
The Riksbank, Sweden’s central bank has been exploring, discussing, and testing digital currencies for longer than others. The Riksbank’s e-krona program was launched in 2017 and a pilot program was launched in 2020. It is currently in the second phase. Cointelegraph spoke with Carl-Andreas Claussen (a senior advisor at Riksbank’s payments department) about the many reasons central banks might implement a CBDC. However, “at Riksbank it is first of all a decline in Sweden’s use of cash.”
Sweden is on the verge of becoming the first cashless country in the West. The percentage of Swedes who use cash has fallen from 39% down to 9% between 2010 and 2020, according the Riksbank. This raises some questions. As Claussen told Cointelegraph:
“If physical cash is lost, the public will no longer have access to central bank currency. This will represent a significant change from the way it has been in Sweden for 400 years. The Riksbank will provide central bank money that can be used by the public through an e-krona.
However, Sweden has yet to make a decision. Claussen stated that it was not clear if we would need it. “First, we must decide if we really need it and if it’s worth it. “We are still not there.”
Claussen is certain that any modern government can issue a digital currency. However, it will have to make sure that the CBDC is needed. He stated that neither the Riksbank nor other central banks have made a decision on whether to issue CBDCs. Not even China? He told Cointelegraph that he had not heard of any final decision by the Chinese authorities to issue.
Chile also announced last Wednesday that it was delaying rollout of its CBDC. It explained that a government-issued digital currency needed more research. According to to a report, Chile wants to create a national payment system that is “inclusive and resilient” and protects peoples’ information. However, the central bank stated that they still don’t have enough information in order to make a decision.
According CBDC Tracker only Nigeria and the Bahamas have made it to full CBDC “launch” in real life, while 2022 has seen more cancellations of projects such as Singapore’s Project Orchid, than full rollouts. However, five pilot programs were in place in January 2020, while 15 were in place in May 2022. This suggests that more launches may be on the horizon.
What’s driving this trend?
BIS believes there are many motivating factors that have led to this “growing momentum” toward CBDCs. Advanced economies are more interested in improving domestic payment efficiency and safety while maintaining financial stability. Poorer countries, emerging markets, and developing economies may be more concerned with financial inclusion or looking for ways to allow people without a bank account to take part in the economy.
Andrey Kocevski (co-founder of WhisperCash.com), whose company has developed a digital bearer tool that can be used by CBDCs, agreed that developing countries often “want to compensation for the absence of private sector fintech and payment companies and increase financial inclusion for unbanked,” telling Cointelegraph.
“I’m not surprised that central banks are now exploring digital currencies, considering it was 80% last year and 30% in 2018.
Noll stated that “for advanced economies, the catalyst were stablecoins,” and that 2021 would be “the year of stablecoins.” He said that central banks in developed countries began to consider the possibility that stablecoins might make headway against fiat currencies. This could threaten their monopoly over money and potentially disrupt monetary policy.
BIS claimed that the COVID-19 Pandemic was a prod. However, Noll stated that there is not much evidence to support this claim. “I don’t see any evidence for COVID-19’s impact and a flight from money driving new interest CBDCs,” he said. “Cash usage is strong and could be returning to pre-pandemic levels.”
Peer pressure could also be a factor — yes even among central bankers. Buckley explained to Cointelegraph:
“If one of the major competitors countries does this, everyone feels the necessity to follow them or risk being left behind — some kind of sophisticated FOMO.”
Kocevski agreed with this statement: “Central banks of developed countries feel the necessity to digitize to remain relevant.”
Are digital currencies controlled by states able to co-opt crypto-currencies?
What role does cryptocurrency play in this whole thing? To be clear, government digital currency is usually issued in the currency unit used by the country, such as dollars in the United States and pesos in Chile. It is also a liability of the central bank. By contrast, cryptocurrencies have their own currency unit — such as Ether ( ETH). These private digital assets are not subject to central bank claims.
According to the BIS survey most central banks believe that payment networks such as Bitcoin and Ethereum pose little threat to their activities. Stablecoins are also seen as a threat. “Most central bank respondents still consider the use of cryptocurrency for payments trivial or restricted to niche groups,” they said.
But, wouldn’t CBDCs present a danger to cryptocurrencies? Buckley stated that he believed they would a year ago, but now he doesn’t believe so. CBDCs are payment instruments while cryptocurrencies are more speculative assets. He said that while these new instruments won’t pose an existential threat for Bitcoin and other cryptocurrencies, they will make Bitcoin’s argument for itself as a speculative asset more difficult.
Cointelegraph was told by Gourav Roy (a senior analyst at Boston Consulting Group India) that crypto is still viewed as a threat to many countries’ macroeconomics and main financial/payment environment. These governments regularly issue warnings about crypto, pass legislation to tax crypto transactions and sometimes ban it altogether. Roy cited China as an example: The country banned cryptocurrency while simultaneously “carrying out one of the largest CBDC pilot tests with 261 million people.”
Roy believes stablecoin projects will survive and continue to play an important role in the decentralized financial ecosystem, even with widespread CBDC adoption. Kocevski didn’t believe that crypto-related government-issued money was a threat.
Noll believes that CBDCs can co-exist with cryptocurrencies. He also believes that CBDCs could possibly “work to popularize mainstream crypto in general,” he said to Cointelegraph.
CBDCs are a downside to crypto because they will crowd out private cryptocurrencies, particularly stablecoins that focus on retail payment areas. Cryptocurrencies will remain in niches within the payment system, where they can serve unique functions or provide specialized services.
In general, there has been a lot of progress on the CBDC front over recent years. The most successful projects have been in non-Western countries like China, Nigeria, and the Bahamas. However, there is increasing interest in Western economies such as Canada and France, which are already equipped with advanced payment systems. Noll stated:
“Just take a look at President Biden’s executive order. It is all about advancing the U.S. CBDC. This is a far cry from 2020 and 2021 speeches made by Fed officials who questioned the necessity for such a thing.”