In recent news, The People’s Bank of China has integrated Tencent and Alibaba, namely their WeChat Pay and AliPay services alongside the recently launched WeBank and MYBANK into its very own beta digital yuan currency system that is being put to the test in cities across China such as Shenzhen and Suzhou. By creating the cyber yuan, China has become the first major economy to create a blockchain-based digital version of its own currency. The Bank of England and HM Treasury announced mid April that they have jointly created a CBDC Taskforce to examine future potential within the UK.
Such news has set a storm surrounding digital currencies globally, with Deloitte pushing the question: are central banks digital currencies (CBDCs), the money of tomorrow? Forbes echoed this sentiment, arguing that digital currency could potentially completely change society’s relationship with money. Due to the proliferation of Ethereum and Bitcoin, global central banks are researching how digital currencies could work on a national scale.
So in light of this news, this month we are exploring CBDC’s on our blog. What exactly is a CBDC and how do they work? A good start would be to break down what the acronym of CBDC stands for: central bank digital currency. CBDC’s work by using either a digital token or an electronic record to represent a virtual form of a fiat currency (something we have been exploring in previous blogs). A CBDC is centralised. By this we mean that it is both issued and regulated by the competent monetary authority of the issuing country. In more simplistic terms, CBDCs are the digital version of the same fiat currencies that people use on a daily basis.
How did we arrive at this point?
At the beginning, there was money and it has served as a means to be a store of value (an asset that sustains value over a period of time), a medium of exchange (to buy or sell goods) and finally a unit of account (a way to award a price to goods or services). Today, money mostly exists in the form of cash, including bills and coins or in an electronic format, fiat currency. However, we have been living in an era of ongoing money digitalisation. Due to this, the role of cash in society has been slowly declining on a global scale, giving way to the concept of cryptocurrencies. This was particularly felt throughout 2020, ‘as bitcoin and other cryptocurrencies roared back to life’, MoneyWeek reports. Such a revival meant that the longstanding phrase that ‘cash is king’ could be made redundant in our near future, as many central banks have been exploring the future or a cashless society by creating their own central bank digital currencies.
What is the potential of CBDCs?
According to PWC, there are many potential benefits for the issuing central bank when it comes to CBDCs. There is a potential for digital currency to provide a real time picture of economic activity in a region or country. In addition to this, it is possible for CBDCs to provide more timely and accurate economic data for GDP estimates than we currently have today. CoinDesk also asserts that what sets CBDCs apart from currencies already established is that it can help us use new payment technology to increase payment efficiency and lower overall costs.
2021 is proving to be an exciting time for CBDCs and their developments. If you would like to learn more about payment technologies and their potential, contact Vorto Trading at: [email protected]
