central bank digital currencies

When Venezuela created its own central bank digital currency (CBDC) in an attempt to stabilize its faltering economy and out-of-control inflation, it posed some interesting questions. 

Are CBDCs a viable financial solution for failing economies?

Could this be something that every country should implement?

Does the centralization of CBDCs go against everything cryptocurrency stands for or are they the future of widespread crypto adoption?

It’s not just failing economies looking into CBDCs either. The Bank of England released a paper discussing the merits of a national cryptocurrency. Switzerland requested a study on the benefits of launching an e-franc and Canada published a framework for a CBDC.

Is there a future where every country launches its own digital currency?

What is the Definition of a CBDC?

A central bank digital currency is a cryptocurrency issued and controlled by a government, central bank or federal regulator. It’s basically a homegrown cryptocurrency dedicated to and ran by a country.

One of the main drawbacks of widespread crypto adoption is the lack of regulatory control. The implementation of nation-state CBDCs across the board could immediately fix those problems. They could be fully regulated by the state. CBDCs are not decentralized like many cryptocurrencies and represent real money in a digital way.

Governments or central banks would become not just the issuer of the digital currency, but also the regulator. It may offer the security and stabilization that is sometimes lacking with fluctuating digital currencies such as bitcoin. 

Venezuela Launches Petro CBDC

When news broke that Venezuela was poised to launch its own CBDC called the Petro, it was met with varying levels of suspicion and controversy. When announcing the launch of the petroleum-pegged Petro, Venezuelan President Nicolas Maduro took a swipe at the US and laid out his vision:

“They’ve dollarized our prices. I am petrolizing salaries and petrolizing prices. We are going to convert the petro into the reference that pegs the entire economy’s movements.”

venezuela petro

However, the petro cryptocurrency is shrouded in controversy. It has been called a scam by the American authorities, who claim the country is using the petro to skirt US sanctions. Many crypto-enthusiasts have also slammed the idea due to its centralized nature. All of these criticisms are valid. 

But could this concept work for other nations who are dealing with collapsing economies or would it spark the end of the decentralized nature of cryptocurrencies themselves?

Pros and Cons of Implementing a Central Bank Digital Currency 

There are arguments on both sides of the coin in regards to the adoption of central bank digital currencies. 

The opinions largely fall into two categories: long-term crypto users who are opposed to the decentralization of crypto; and those who want to see wider adoption and integration of blockchain technologies and CBDCs to bring together a coordinated effort to regulate the industry moving forward.

The Pros of Using a CBDC

Those who seek greater regulatory measures applied to the cryptocurrency industry such as governments, central banks, and some potential investors are more open to CBDCs. Many believe that the pros outweigh the cons.

  • Boosting the economy – The Bank of Canada Economist, Mohammad R. Davoodalhosseini, claims that even large economies such as Canada and the US could greatly benefit from the implementation of a CBDC. Research from the Bank of Canada (BOC) showed that a CBDC “can lead to an increase of up to 0.64 percent in consumption for Canada and up to 1.6 percent for the US, compared with their respective economies if only cash is used.”
  • Stabilizing failing economies – As we have seen with the implementation of the petro in Venezuela, some economies in the oil trade who are dependent and attached to the US dollar can use a CBDC to reinvigorate their economy.
  • Greater regulatory cohesion – If the people who are issuing the CBDC are the same ones regulating it, greater regulatory cohesion will naturally follow. If a handful of countries adopt CBDCs and collaborate together in a coordinated effort, regulating the industry would be much easier than present.
  • Easy access and confidence – The implementation of a CBDC could help to speed up the process of widespread crypto adoption as the risks currently associated with using crypto would be less if backed by an entire country and a central bank. It would create more confidence in the market for investors.
central bank digital currency countries
A map of countries with an active state-issued cryptocurrency. Credit: Coin Telegraph

The Cons of Using a CBDC

Although the introduction of a CBDC seems like a great idea from one point of view, some central banks think they won’t work. Even the Bank of Japan’s (BOJ) deputy governor, Masayoshi Amamiya has criticized the idea of central bank digital currencies. Here are some of the cons involved with issuing a CBDC:

  • Expensive setup costs – One of the major concerns for Masayoshi Amamiya and other central banks is that creating a CBDC is a costly affair. It’s not only banks that would be expected to implement new technologies but also the entire public sector, middle-men, and customers. As a CBDC is a state-run enterprise, taxpayers would be footing the bill.
  • Loss of financial privacy for users – The most discussed negative issue against CBDCs is the centralized nature of the concept. Most long-term crypto enthusiasts and other anti-establishment types champion bitcoin and other cryptocurrencies because of their privacy and independence from central banks. A CBDC goes against that philosophy.
  • Knock-on effect to pre-existing financial systems – Although introducing a CBDC may work for failing economies, it’s not efficient for larger nations that currently have a massive presence in the global financial markets and successful pre-existing financial systems. 

The Imminent Future of CBDCs

At the time of writing, the only nations using a CBDC are Senegal, Tunisia, Marshall Islands, and Venezuela. Although Iran has also been researching the possibility of introducing one for similar reasons to Venezuela. 

Central Banks might well feel they are being left behind in regards to distributed ledger technology that could very well revolutionize the global financial markets as we know it. Thailand is one such nation that is embracing blockchain and considering its own CBDC. When recently talking about the issue with the Bangkok Post, a spokesperson for The Bank of Thailand said:

“Technological changes are having a major impact on financial services. The Bank of Thailand and local financial institutions agreed to launch a project to raise technological readiness in adopting new financial technologies to enhance operational efficiencies. Creating an ecosystem conducive for collaborative learning in technology will be an important driving force towards a digital future.” 

Although Thailand is currently only in the planning stage, they believe that by early next year, their very own central bank digital currency will be unveiled. 

Conclusion

Central bank digital currencies are an interesting alternative for failing economies with struggling financial systems, but not so much for economic powerhouses that already dictate the global markets at this current time. 

However, the evolving nature of the financial markets and distributed ledger technology, plus pressure from governments, central banks and high places who are pushing for greater regulations and cohesion in the crypto marketplace, means that a CBDC could be coming to a country near you sooner than you think. 

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The United States Securities and Exchange Commission (SEC) is vehemently opposed to a common crowdfunding practice in the cryptocurrency industry called the initial coin offering (ICO). An ICO is similar to an initial public offering where a company or corporation raises investment capital by offering its stock to the public for the first time. Only in an ICO, a digital currency or token is distributed instead of a stock, and the token can have a variety of uses that blur the line of what defines a traditional security.

Still, the SEC believes that the way ICOs are funded has them falling under security laws, and the companies interested in launching an initial coin offering need to comply with SEC private placement rules and investor protection guidelines. Those that fail to comply, may be subject to cease and desist letters in the future, as has happened with a number of US-based ICOs.

To further warn potential investors of the dangers initial coin offerings, the SEC has published a website on the increasingly popular capital raising method, providing what the SEC calls the “three ‘Rs’ of ICOs: Risks Rewards and Responsibilities.”

The website reads:

“Companies and individuals are increasingly considering initial coin offerings (ICOs) as a way to raise capital or participate in investment opportunities. While these digital assets and the technology behind them may present a new and efficient means for carrying out financial transactions, they also bring increased risk of fraud and manipulation because the markets for these assets are less regulated than traditional capital markets.’

The list of potential risks, rewards, and responsibilities is directed both at investors and potential ICO issuers and cover off on how initial coin offerings could be securities, may need to be registered with the SEC, or may pose “substantial risks.” To avoid those risks, the SEC warns investors to do their own research, ask questions, to understand the product, and to take extreme caution if and when an investment sounds “too good to be true.”

The SEC also takes the opportunity to warn would-be ICO issuers, asking them to “use caution before promoting offers and selling coins.”

A month ago, the SEC launched a fake ICO website called HoweyCoins.com to provide a working example of what a fraudulent ICO may look like. Investors who clicked on any of the fake site’s ‘buy now’ buttons, were redirected to educational materials on what red flags to look out for when considering investing in an ICO.

[Image Credit: WikiMedia Commons]

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