Central banks around the world are preparing to introduce their own digital currencies: blockchain-based, but under government control. At this point there are very few actually existing CBDCs in use, but among them is the digital yuan, which is already quite significant.
There was an interesting story at the end of May, as multiple media outlets reported the news: Dubai is launching its own digital currency called DubaiCoin at the starting price of $ 0.17 per coin. It was announced that customers will be able to use DubaiCoin to pay for goods and services both online and offline: the cryptocurrency will be used in place of conventional paper bills. Allegedly, the circulation of DubaiCoin would be controlled by the city itself, as well as by select brokers.
However, just a few days later, Dubai authorities warned that DubaiCoin is a fraudulent cryptocurrency scheme. According to city administration officials, Dubai is a region with favorable conditions for the development of blockchain and cryptocurrencies, and it has no shortage of promising projects.
That would have been just an amusing crypto scam, of which there are plenty, were it not for two important points. Firstly, in October 2018, the Dubai Department of Economic Development, together with the state financial company Emcredit, already announced its own digital currency. Namely, a stablecoin called Emcash, which was supposed to be backed by the dirham, the national currency of the United Arab Emirates.
More importantly, the states themselves are actively developing their own central bank digital currencies (CBDC). That means they are in the spotlight – and therefore attract scammers.
Putting scammers aside, we all still need to establish our attitude towards CBDC. What will it become (and in some places already is) – an innovative payment tool or a means of the state authorities to destroy the cryptocurrency market that is not under their control (and therefore highly undesirable)?
Don’t forget that the interest of central banks in different countries in blockchain technology, cryptocurrencies and their use in public finance initially arose during the first cryptocurrency boom period – in 2017, to be exact. That was the trend, it was on everyone’s lips and financial officials were eager to show how they were keeping step with the times. The author of these lines has messages stored in the back about at least 70 countries, whose central banks have considered, created, tried, tested or discussed the implementation of their own CBDCs.
So far, though, not counting exotic places like the Marshalls, the Bahamas or Venezuela, the Chinese project is the only one known to be implemented. Beijing is still very cautious with promoting its digital yuan (called DCEP), so the project has been undergoing continuous testing since October 2020. One of the latest news on this topic: the PRC leadership held a lottery, the winners of which received 40 million DCEP (this amounts to $ 6.2 million). A total of 200,000 of so-called “red packages” were drawn, each containing 200 digital yuan ($ 31). Those could be spent at stores that have joined the Chinese CBDC testing program.
According to Li Bo, deputy head of the People’s Bank of China, the country will expand the list of similar projects and may allow foreigners to use DCEP during the 2022 Winter Olympics.
On May 18 China banned financial institutions and payment companies from providing services related to cryptocurrency transactions specifically to prevent “real” cryptocurrencies from competing with the digital yuan.
For now, many central banks have confined themselves either to their own studies on the possibility of issuing CBDC, or to real, but limited projects. However, the current second cryptocurrency boom has once again made the release of CBDC a hot topic. Pilot projects, in addition to China, have already been launched by the central banks of Canada, Sweden, South Africa, Singapore, Japan and Ukraine. The newcomer to this “club” is the central bank of South Korea, which recently announced plans to test the functionality of its own digital currency from August 2021 to June 2022.
The goal of the trials is to see whether CBDCs can be a functional replacement for regular money. However, the Bank of Korea stressed that testing the digital currency does not mean that there are projects to launch it into circulation.
Another country preparing to test its national currency on blockchain is Canada. A representative of the Bank of Canada has already stated that their digital currency will be more environmentally friendly than other cryptocurrencies. Issuing the digital Canadian dollar will not be done by traditional, environmentally harmful methods of mining cryptoassets. However, according to Deputy Governor of the Bank of Canada Timothy Lane, the basis for the Canadian CBDC, as always, will be the trust of residents in the country’s central bank, not the “Proof-of-Work” principle.
Another Bank of Canada representative, Scott Gendry, listed the following benefits of CBDC:
– the ability to provide citizens with an effective and secure payment instrument as an alternative to cash,
– convenience for interbank payments,
– a chance for central banks to be competitive on par with commercial market players,
– increasing confidence in the financial system,
– universal access to payments: for everyone, anytime, anyplace.
The United States and the EU are timid for the time being, but still are preparing just in case – so as not to be left on the sidelines later.
However, earlier this year Christopher Giancarlo, ex-chairman of the Commodity Futures Trading Commission (CFTC) announced the creation of a non-profit research center, the Digital Dollar Foundation. The organization explores the economic feasibility of US digital currency and its potential benefits. Also, as it is understood, it works closely with the Federal Reserve System.
In turn, the European Central Bank held public consultations in the fall of 2020 on the possibility and feasibility of creating the digital euro. And just before that, its president, Christine Lagarde, had suggested that the heads of Eurozone central banks were close to a decision on whether to continue developing CBDC.
To sum up, the topic looks as relevant as ever – and, apparently, the time for the widespread introduction of CBDCs is near. Especially if China’s experience in this area turns out to be successful.
Proponents of the early implementation of CBDC point to such advantages as initial recognition as legal tender, provision of government assets, the ability to make payments and settlements much faster than now, and most importantly – no commissions (intermediaries who make money off commission fees are completely eliminated). Finally, it is believed that central bank digital currencies will be especially relevant for the third world countries, where a very significant proportion of the population still does not have bank accounts.
Still, the critics of CBDC have much more arguments on their side. Firstly, people are unlikely to want to trade off the anonymity that regular cryptocurrencies provide for the promise of anonymity from the government. Simply put, they won’t believe it. Secondly, in case of China, it doesn’t even promise anonymity to DCEP users. So if, for example, the state suddenly decides to fine you, your crypto wallet with CBDC will simply be empty. And there is no hiding your coins under the pillow…
Among other objections we have the fact that not all citizens have the necessary equipment (even in Japan, only 65% of citizens have smartphones), CBDCs cannot work offline (if there is no electricity or the Internet, it is impossible to pay), the risks of hacker attacks, low technical literacy of the entire segments of the population, etc. And most importantly: Satoshi Nakamoto, creating Bitcoin, originally pointed out that its purpose was to make money independent of states and banks. So the use of blockchain to create state currencies (same fiat, but now on blockchain) is itself a kind of dark irony.