While we were away, the month of August saw some significant announcements in the realm of international cryptocurrencies -- whether it was Binance launching their stablecoin project: Venus, Walmart developing its own Blockchain, Telegram launching its Gram cryptocurrency, and Japanese e-commerce giant Rakuten unveiling its digital currency exchange, these all instantiated the notion that cryptocurrency is rapidly progressing. Additionally, the continuation of the debate amongst regulators over whether stablecoin project Libra ("Facebook's" cryptocurrency) should become the holy grail to banking the unbanked globally. However, as you may recall earlier this year France's finance minister, Bruno Le Maire, stressing that “it is out of question’’ that Libra be allowed to “become a sovereign currency. It can’t and it must not happen.”
What has happened since the launch of Libra, is the warming of Central Banks, once thought to be antagonists of cryptocurrencies, into the crypto fray, with several announcing that they are exploring or experimenting with Distributed Ledger Technology (DLT), and the prospect of central bank crypto- or digital currencies is attracting considerable attention. This is, in part, fueled by the the underlying motivation for issuance (e.g. decline in the use of cash), possible design features (e.g. 24/7 availability, anonymity) and to some extent technical experimentation (involving DLT). Similarly, concerns regarding CBDCs are focused around the fundamental impact they could have on the current financial ecosystem, ultimately questioning the role of banks in financing economic activities, and making their issuance unlikely in the short run.
The People’s Bank of China (PBoC) recently announced that it was placing the finishing touches on its very own CBDC, placing it at the forefront of 44 other central banks who are researching the issuance of a CBDC. Some examples of CBDCs already under development include: Dubai’s emCash, The Bank of Thailand’s Project Inthanon, The Bank of Lithuania’s Digital Collector Coin, The UAE Central Bank and The Saudi Arabian Monetary Authority’s Project Aber, The Marshall Island’s Sovereign (SOV), The Central Bank of Iran’s Crypto-Rial, Uruguay’s e-peso, and The Swedish Riksbank’s e-Krona. According to a report by the Bank for International Settlements (BIS) Central Banks are also increasingly collaborating with each other to carry out proof-of-concept work. Collaborations include Project Stella by the ECB and the Bank of Japan, as well as a joint project by the Bank of Canada (BoC), the Monetary Authority of Singapore (MAS) and the Bank of England (BoE).
Question is, do we really need a CBDC? To answer this it is important to note that CBDCs are predominantly digital twin of traditional printed fiat currency, and are therefore to be fully regulated by the state and not decentralized. Given this, CBDCs hold two notable benefits: (1) they alleviate the costs related to printing fiat currency, maintaining its usability and security, providing infrastructure to store and move it, and distributing it. (2) CBDCs improve overall accessibility and usability of currency, this is because printed fiat currency imposes large costs on those that wish to use it -- whether its making a cash deposit into a bank account (requiring access to ATMs or branches) or safekeeping large amounts of it (requiring a secure storage mechanism i.e. a safe). Realistically, such use cases only speak to states in which the use of printed fiat currency is high, and thus the cost benefits of introducing a digital currency are significantly high i.e. Emerging Market Economies (EMEs).
The BIS report does a great job to sum up the current state of CBDC projects, noting that "At this stage, most central banks appear to have clarified the challenges of launching a CBDC but they are not yet convinced that the benefits will outweigh the costs. Those that do see clear benefits are predominantly from EME jurisdictions. This seems to be because financial inclusion projects create a clear mandate for central bank action, and a lack of current infrastructure limits the disruption a CBDC could create while simultaneously encouraging the use of new technology." Whilst a CBDC provides users with less costs incurred to use and store paper fiat currency, it will also mean a reduction in deposits with commercial banks. In turn, the resultant competition for deposits among such banks will likely increase deposit rates, driving new innovations to encourage saving and borrowing behavior -- which is good!
Source: Bank for International Settlements (Proceed with caution - a survey on central bank digital currency)