CBCD : What is it and how will it change the world economy?
What is CBCD and how will the world economy change because of it?
The typical retail investor may assume that Central Bank Digital Currencies (CBDCs) are a high-brow concept that is still in the conceptualisation stage and will only take effect in the future. However, according to Atlantic Council, ten countries have fully launched CBDCs, the most prominent of which has to be the digital yuan, also known as e-CNY, that was launched in China and continues to make superb inroads into consumers’ payment habits. The IMF also noted in a speech in February 2022 that about 100 countries are currently exploring CBDCs in one way or another. Hence, CBDCs may well become as ubiquitous as fiat currency. Just what are the advantages of CBDCs?
CBDCs are backed by the central bank, so they are recognized as legal tender and can be used as a payment app. Besides the peace of mind afforded to citizens, CBDCs come in handy during periods of economic downturns because central banks can deploy them quickly to give out stimulus checks to the lowest-income groups who need government handouts the most.
CBDCs are distributed through commercial banks. This alleviates the problem of too much disruption to the financial system.
CBDCs help unbanked populations get access to money and be included in their nation’s financial systems. Take for instance Jamaica, in which 17% of the population are unbanked. Since mobile phone use in Jamaica is pervasive, the authorities’ launch of a CBDC called Jam-Dex will help unbanked Jamaicans get paid electronically since they can access it via a banking app on their phones. The same can be said of the Bahamas, which launched the Sand Dollar in October 2020 to reach out to its unbanked population.
CBDCs provide cost savings. One reason why Jamaica piloted its Jam-Dex program in the first place was the substantial cost (more than $7 million) incurred in replacing dollar notes of all kinds. Removing all transaction costs problems associated with cash will thus save government agencies and business enterprises money.
CBDCs bolster resilience to the domestic payments market. In China, AliPay and TenPay/WeChat Pay dominate the mobile payments market. Should the private enterprises governing these mobile payments suffer a huge hit to their vitality, the repercussions on the mobile payments system could be far-reaching (and aggravated if there are no safety nets in place). The incorporation of the e-CNY was aimed to act as a backup to AliPay and TenPay/WeChat Pay.
CBDCs facilitate cross-border remittances at a low cost. Cambodia launched its CBDC, Bakong, in October 2020. Since many Cambodians work overseas in Malaysia, the National Bank of Cambodia collaborated with Malaysian commercial bank, Malayan Banking so that Cambodian migrant workers in Malaysia could send money to their loved ones without hassle.
CBDCs act as a safeguard against the illicit use of money. The Bahamas did not have a robust Anti-Money Laundering/Combating Financing of Terrorism framework and was flagged out to undergo extra monitoring under the Financial Action Task Force list in 2018. Following its introduction of the Sand Dollar, the Bahamas was taken off the list in December 2020.
CBDCs is a safer option compared to stablecoins, which are largely unregulated and pose risks to the financial system. The recent collapse of the algorithmic stablecoin, UST underscores this point.
CBDCs ensure monetary sovereignty. Particularly, the United States would be concerned if global citizens start adopting a stablecoin or a foreign CBDC en masse, thus leading to the possibility that the U.S. dollar might not remain the world’s favored payment mechanism. This explains why President Joe Biden signed an executive order in March 2022 that focused on the exploration of a U.S. CBDC.