24 Aug 2022 Arjun Agarwal
Are CBDCs Going To Play An Important Role In The Future?
Recently, Colombia became the latest country to float the idea of fully embracing cryptocurrency at a national level. At the center of the speculation was the idea that the central bank would launch its own “crypto” coin - a CBDC, in the jargon - that would harness the benefits of cryptocurrency and point Colombia’s future squarely towards a digital destination. For those who take an outside interest in crypto coins, this may have sounded like a sensible step into the future.
Not everybody received the idea so warmly, though, with the majority of the dissatisfaction being down to the idea that a centralized digital coin seems to entirely miss the point of cryptocurrency itself. Whatever guide to crypto you pick up, it never seems like you have to read especially far before you get to the word “decentralized”. For anyone who has been trading Bitcoin or Ethereum thus far, the idea of a centrally-controlled, government-issued crypto coin has little to recommend it. However, as governments look at ways of harnessing the energy that has grown up around crypto, could CBDCs be a part of the future?
Best of both worlds, or falling between two stools?
If there is one thing that seems to unite the average crypto trader and the average Federal Reserve money guy, it’s that they tend to agree there’s not much demand for central bank digital currencies. If they’re issued by the central bank, then they are by definition traceable and deanonymized, which is a significant red flag for crypto supporters. And if the central bank is issuing them and sees them as a possible option for those who have difficulty opening a bank account, why does that need to be treated as a cryptocurrency? The means already exist to transfer money digitally. In trying to be a useful alternative currency that attracts crypto investors, CBDCs may fail to hit on either of those fronts.
Who is looking at CBDCs?
Part of the issue with central bank interest in cryptocurrencies is that, from nation to nation, the definition of a cryptocurrency seems to differ at the highest level. A crypto, to most people involved in their trading, is by definition a decentralized anonymous asset that you can trade for other assets or use at a Dogecoin casino without giving your name. However, when the Colombian government floated the idea of becoming more crypto-friendly, a CBDC was the core element of that.
Governments such as Australia, the UK and others are also looking at issuing their own CBDCs, but the Bank of England is explicit in its statement that these are not crypto assets. This indicates that they could still look to regulate crypto in the future and do so with less favourable conditions than they extend to their own digital currencies.
Will CBDCs ever actually take hold?
There has to be some skepticism as to whether CBDCs will ever get more than the most muted of rollouts. Although both South Korea and Japan are expected to follow near-neighbor China in releasing digital currency solutions, their use is expected to be on a very limited basis. People who prefer fiat currencies will continue to prefer them, and people who prefer crypto will run a mile from the centralized assets issued by banks. Something like CBDCs may play some part in the future, but expecting them to become dominant in any way would be fanciful.
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