Central Bank Digital Currency: A Key Force Driving the Future of Finance

Author: Cypherium

Compiled by: ChainCatcher

Central Bank Digital Currency (CBDC) is one of the most significant developments in the realm of digital currency and the future of finance. Supported by their respective national central banks, they will have greater credibility than existing stablecoins, thereby increasing the likelihood of widespread adoption of digital currencies. Central banks around the world are now working hard to pilot and develop their CBDCs.

There are many reasons why CBDCs are viewed as a top priority for central banks. First, private-issued currencies like Bitcoin, Doge, and Tether have captured a significant market share over the past year, so if central banks do not keep pace with digital currencies, they will fall behind in the competition.

Secondly, in today's era, carrying cash has become extremely inconvenient, especially considering that the global pandemic is still ongoing, and cash can facilitate the spread of the coronavirus. The speed at which cash is sent across traditional borders is also slow, leading to limited interoperability.

Third, another significant benefit of digital currencies is that they can help banks promote monetary policy and reduce money laundering and tax evasion.

However, several infrastructure systems will be needed to prevent money laundering, such as the ability to track funds and identify users executing these transactions (KYC infrastructure), and privacy protection (which must balance government access to citizens). Currently, only the most advanced countries/regions have the data centers and processors to carry this out.

While over 80% of central banks are researching CBDCs, China and Sweden are at the forefront of this movement as they have already launched digital currency projects. Undoubtedly, China is the leading economy in the CBDC race.

It is clear that it wants to become a global blockchain superpower and is making strides toward that goal. The People's Bank of China has been leading the development of the digital yuan. It aims to be an effective way to digitize circulating cash and is currently operating as a retail CBDC.

Recently, a district in Shenzhen, China, launched the "iShenzhen" lottery, through which the government distributed 20 million digital yuan to 100,000 CBDC wallet holders. If account holders do not use their digital yuan within a few weeks, it will disappear. Suzhou, one of China's major economic special zones, also held a similar lottery.

Also read: Tesla now accepts Bitcoin. Is crypto payment the future of business?

As a region, Suzhou has been involved in various blockchain projects to enhance local government understanding of decentralized technology, smart contracts, and the blockchain literacy that citizens need to embrace.

China has gone further and even started piloting with major domestic e-commerce platforms. First, JD.com—China's second-largest online retailer—distributed 20 million yuan in its fintech department's lottery. Users who obtained digital yuan through this lottery can spend it on JD.com's online e-commerce platform as part of a real-world CBDC trial.

Additionally, it has been reported that the Shanghai subway now has vending machines where users can transact for any products held in the machines using digital yuan.

Despite initial speculation that China was launching its CBDC project to break the digital payment duopoly of Ant Group's Alipay and Tencent's WePay in the Chinese digital payment market, they have included banks owned by both companies in their CBDC project.

These two payment platforms together account for over 93% of China's booming digital payment market. Ant Group's MyBank and Tencent's WeBank have been invited to participate in the digital yuan trial. Once involved, MyBank and WeBank customers will access their accounts and transact through the digital yuan wallet application operated by the People's Bank of China.

Furthermore, the People's Bank of China (PBOC) is conducting an ongoing initiative in Hong Kong called the "Inthanon-LionRock Project." This project advances the work done by the Bank of Thailand (BoT) and the Hong Kong Monetary Authority (HKMA) to explore and study the cross-border payment operations of CBDCs. This involvement strongly indicates that the People's Bank of China understands that interoperability is crucial for the success of its CBDC.

The surge in the adoption rate of digital currency in China is an initiative that could make Chinese goods and services more accessible in the global market. Even Citigroup believes that the digitization of fiat currency is inevitable and a natural result of distributed ledger technology.

Businesses and governments have been ramping up investments in this upcoming technology to ensure they have a very valuable first-mover advantage in such fields.

Smaller countries will find it easier to implement CBDCs due to their smaller economic scale and higher government autonomy, especially compared to populous countries like China and the United States.

The Bahamas recently launched their Bahamian Sand Dollar, making it the world's first CBDC, although its monetary operations and penetration do not seem to be as intrusive as China's experiments.

Cambodia recently launched Bakong and a blockchain-based interbank platform. Even the Federal Reserve is now testing CBDCs, with results yet to be announced. The Fed is collaborating with traditional financial institutions, focusing on wholesale CBDCs rather than retail CBDCs like the digital yuan.

Meanwhile, the Fed is also working to improve its own systems and innovate in the payment space. The U.S. central bank's system experienced hours of downtime on February 24, providing another impetus for the Fed to push its CBDC project, highlighting the increasing need for the Fed to enhance its existing payment systems through the implementation of CBDCs.

As a catalyst for all global CBDC initiatives, the Bank for International Settlements Innovation Hub (BISIH) has stated that CBDC research is a top priority for 2021. BISIH plans to assess the feasibility of faster and cheaper cross-border payments for major economies.

It has also been announced that BISIH will collaborate with the G20, the International Monetary Fund (IMF), and the World Bank to work towards "normalizing" the use of CBDCs in the financial system.

Research from the International Monetary Fund indicates that interoperability is key to the success of CBDCs, as many politicians and economic experts believe they can serve as an economic weapon. Once countries like the U.S. and China launch their CBDCs, the tokens will begin to have additional uses beyond domestic transactions.

Currencies from these countries will start appearing in the digital wallets of consumers in other countries like India or Sri Lanka, allowing them to use this currency to purchase products in international markets. This will open up international trade scenarios, promote retail market usage, and increase currency adoption, giving users more liquidity and convenience.

As the diffusion of certain currencies alters global trade dynamics, it will be crucial for public and private participants to promote the large-scale adoption of CBDCs in a collaborative manner. It is becoming increasingly clear that for CBDCs to succeed, they must also be able to interoperate with other payment systems, digital assets, and other CBDCs.

Originally published at: https://e27.co/how-interoperability-between-private-and-public-players-will-accelerate-the-cbdc-race-20210409/

Cypherium is a decentralized smart contract platform for creating and connecting dApps, CBDCs (Central Bank Digital Currencies), enterprise applications, and digital assets. We collaborate with industry-leading enterprises and government agencies and are one of the first blockchain companies to have real, tangible blockchain applications.