• What is CBDC?

  • Cash is inefficient.

  • The use of CBDC eliminates anonymity.

  • CBDC provides a dizzying array of new policy choices.

  • CBDC – a matter of when not if.

In recent weeks the media focus on central bank digital currencies has become quite intense as many of the world’s central banks including ECB, BoE and BoJ all stated that they are exploring the possible uses of this technology. So what are the pros and cons and policy implications of CBDCs?

What is CBDC?

Central bank digital currencies are simply digital versions of legal tender of the central bank of each country. The immediate benefits are obvious. Cash in the form of paper money and coin is onerous to produce, count and maintain. In the advanced industrialized world where almost all economic transactions take place digitally cash is quickly becoming obsolete already.

Cash is inefficient

A move towards CBDC would eliminate the need for cash and would allow millions of unbanked citizens to have a safe, secure store of value. At a time when the vast majority of the population in the OECD world possesses a smartphone, the issuance of CBDC would be relatively easy to implement.

The use of CBDC eliminates anonymity

However, the idea of a digital currency is not without its downsides – the most serious one being the loss of anonymity. CBDC would be fully trackable which would allow the government to have unprecedented access to every citizen’s transaction history. One could make an argument that in the current environment where the vast majority of all economic transactions are digital already, such unfettered access already exists. However, the issuance of CBDC would formalize this ability to track every economic transaction and furthermore would effectively eliminate the choice of anonymity that cash currently offers.

CBDC provides a dizzying array of new policy choices

From a policy perspective the prospect of a CBDC provides almost a dizzying array of policy choices to monetary and fiscal authorities. First and foremost, the creation of digital tender would allow for much greater control and oversight over economic transactions and would eliminate almost all illegal and grey market transactions allowing for much more precise combat of criminal activity as well as much more efficient tax collection.

The move towards CBDC would also allow for policy actions that are simply not possible now such as negative interest rates on cash balances and perhaps the most radical notion of all the ability to put an expiration date on the currency itself. Such possible policy initiatives would allow for much greater behavioral control at the consumer level and could be used to encourage or discourage spending, thus providing much greater granulary over demand and supply in the economy. The leader in the CBDC space is the central Bank of China which has been experimenting with digital yuan in Beijing and Shanghai and plans to expand the pilot program to other jurisdictions. In China, where 87% of all payments are already settled via smartphones, the move towards digital currency should be relatively easy to implement and in a highly centralized society it will offer the government near complete control over their citizens’ economic lives.

CBDC – a matter of when not if

In the OECD world of democratic societies such absolute control over the ability to manipulate legal tender is likely to be resisted and central banks will likely have to adhere to some modicum of privacy regulation so that citizens are able to exercise some degree of autonomy over their financial assets.

Still the technological and policy implications of CBDC are simply too powerful for authorities to ignore and may even endanger the competitive stance of western economies if the technology is not quickly adapted. This is the reason why so many western central banks are now studying the idea and why adoption of the CBDC will become the norm in the decade to come.

Past performance is not indicative of future results. Trading forex carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading on margin, and seek advice from an independent financial advisor if you have any doubts.

Feed news

Latest Forex Analysis


Latest Forex Analysis

Editors’ Picks

EUR/USD remains pressured below 1.21 ahead of critical US CPI data

EUR/USD is under pressure below 1.2150 as the dollar benefits from concerns over the escalation in the Middle East and fears of rising interest rates.

EUR/USD News

GBP/USD trades above 1.41 amid risk-off mood, upbeat UK GDP

GBP/USD is trading above 1.41 but below the highs. The risk-off mood boosts the safe-haven US dollar, while sterling is underpinned by upbeat UK GDP data. The economy shrank by 1.5% in Q1, better than expected. US inflation data is awaited. 

GBP/USD News

Gold: A big miss on US CPI to drive XAU/USD above 200-DMA?

Gold pressured amid fears of rising inflation, interest rates. US dollar’s haven demand lifted on Middle East tensions. Disappointing US CPI could revive gold’s bullish momentum.

Gold News

Top six cryptocurrencies under $2 that overtake Bitcoin

Bitcoin price reaching over $64,000 has priced out many investors in the market that has missed many of its bull rallies. Investors are increasingly looking into altcoins, which have absolute prices that are cheaper than the leading cryptocurrency.

Read more

US Consumer Price Index April Preview: The two base effects of inflation

American consumer prices are set to rise by the most in a decade as the base effect from last year’s pandemic collapse reaches its height. The Consumer Price Index (CPI) is expected to climb 0.2% in April.

Read more

Majors

Cryptocurrencies

Signatures