What do we know about central bank digital currencies?


You could have heard of central bank digital currencies (CBDCs). It’s also possible that you’ve heard words of praise or criticism, but everything about these currencies is a bit confusing. So let’s take a look at the central bank digital currency that is currently furthest along in its development – the digital yuan (or also e-CNY). How is it actually supposed to behave and what does this digital currency entail?

Central bank digital currency

CBDCs are supposed to represent a revolutionary step in economic solutions. Currently, 86% of central banks around the world are exploring the possibilities and possible developments. But it is safe to say that China is the furthest along in this sector. The history of China’s digital currency dates back to 2014, with pilot projects running since late 2019. As of June 30, e-CNY had processed about 70 million transactions, with a total value of about 34.5 billion yuan (about $5.3 million). However, it is still a start; WeChat Pay is more popular in the country so far.

The CBDC is basically supposed to perform all the functions of a legal tender and has yet to bring restrictions on terrorist financing, and payments should work without an internet connection. But it’s worth pausing to consider that there are two sides to everything. China’s CBDC is set to completely replace the country’s fintech giants (e.g. Alibaba), and in the country’s development plan one can find references to the use of the latest technologies, and one certainly does not miss the repeated emphasis by General Secretary Xi Jinping on the need for more intensive use of modern technology to run the state.

There are two sides to everything

Of course, it is impossible to predict which way the digital currency path will go. But there are concerns that the currency could merge with the social credit system. In some cases, people with low credit can’t get on the fast train, so people are questioning what could happen if finance comes into the mix. It’s not just the system that leads to this idea, but the CBDC’s programmability, which can be read in the whitepaper.

The whitepaper basically doesn’t specify anything, but we know that at the moment CBDC is widely used to pay fares, and The Wall Street Journal reported that one of the pilot projects included a kind of “expiration date”, there are arguments for this, to avoid over-saving and to kick-start the economy in times of crisis.

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There are still a lot of question marks around central bank digital currency in general, and it is not clear in principle how exactly such a currency would work. Like everything, CBDC has its detractors and enthusiasts, but all should agree on one thing: the currency should not be used as an instrument of power. In any case, it is safe to say that central bank digital currency also has two sides to the coin.

Source: seznamzpravy.cz

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