Digital currencies once mostly considered stored value in a distributed data base on the intranet may be posed to bust out with greater consumer and institutional acceptance. This is due in part to central banks now looking to create their own digital currencies albeit at a modest pace. Increased acceptance seems to be both a response to the rise of cryptocurrencies like Bitcoin in recent years and a way to potentially help address the major global economic impact of COVID-19 and cross border payment issues.
Today it appears digital currencies are here to stay. When digital currencies first started appearing, many experts claimed they might never take off and certainly would never meaningfully impact physical currencies. This notion appears to be changing.
Late last year in the United States, two congressmen, French Hill and Bill Foster, wrote an open letter to Federal Reserve Chairman Jerome Powell calling for the need for a US dollar digital currency “increasingly imperative.” As examples, the letter notes two countries, Sweden and Uruguay, who were already pilot testing digital currencies – the e-krona and e-peso respectively.
In 2020, China launched a pilot test program for its own digital yuan, internally being called DC/EP, the shortened version of “digital currency/electronic payment.” This is the first electronic payment system launched by a major central bank, and it shares some features and similarities to Bitcoin and Facebook’s Libra.
Launching in 2020, Libra has faced significant backlash from other countries and regulators alike. While it is often referred to as “Facebook’s Libra,” it is not solely a Facebook project. In fact, it is owned by the Libra Association, a Swiss organization of about 27 members, including Facebook, Uber, Spotify, and venture capital firms. While you cannot yet buy Libra coins, you can invest in Facebook, whose stock went up 18% in the last year. One of the biggest fears or complaints about Libra and other independent cryptocurrencies is that they “could reach billions of people and actually erode sovereignty over monetary policy.”
Central banks are starting to move forward with creating their own digital currencies. The United States and many European countries are already looking into it and China as mentioned is testing one already. In fact, the EU noted that the erosion of state control over traditional money is a problem and has “urged the European Central Bank to look at issuing a digital currency.” That being said, Europe’s biggest banks recently called upon the European Commission to implement tough oversight regulations to protect and preserve sovereignty over monetary policy according to Reuters.
It is interesting to see how cryptocurrency, originally developed by people to subvert mainstream government authority and regulations over money, has become so ubiquitous that central banks around the world are now creating their own versions years later.
However, central bank digital currencies (CBDCs) are fundamentally different from Bitcoin and other currently-available cryptocurrencies. For one thing, CBDCs are traditional money just in digital form, both issued and controlled by the country’s central bank. Bitcoin has no centralized governing body. Many retailers do not accept cryptocurrencies as payment because they are not “legal tender” – but CBDCs are (will be). The other specific difference is that currently cryptocurrency values are determined by the market and CBDCs will be influenced the same way traditional paper money is – by monetary policy via a government, trade policies, and the market.
The only real similarity between cryptocurrencies and CBDCs is that they are both based on blockchain technology.
As a note, debit cards and e-payments are not the same as CBDCs. CBDCs would not be a representation of physical money, as debit cards or Venmo money is now, but would be a full and complete replacement for paper money and physical minted coins.
Not all countries around the world have jumped onto the CBDC bandwagon. Japan is skeptical and believes there are major issues that need to be addressed regarding the effect of CBDCs on commercial banking and interest rate policies.
On the other hand, CBDCs could make moving money internationally easier, and could also potentially improve a country’s ability to trace and track money laundering and corruption, as well as making it much faster and easier to measure the impact of new monetary policies.
As for the U.S., “Federal Reserve Chairman Jerome Powell acknowledged that the central bank is looking into the possibilities of a CBDC. While the Fed hasn’t developed its own digital currency, it is continuing to “carefully analyze the costs and benefits of pursuing such an initiative in the U.S.,” Powell said in a letter to lawmakers in November .”