Cryptocurrency was not something that initially spurred the interest of governments, until a decade later when bitcoin began to rise in popularity and new stablecoin offerings were announced. Suddenly, governments and banks began taking note of Bitcoin, its offspring technology, the financial products leveraging the technology, and digital currency in general. From this, the idea of a CBDC (central bank digital currency), first proposed in 1987 by Nobel laureate James Tobin, became a hot topic. In 2021, CBDCs are now a viable path forward for governments, and their rise will again change the highly volatile market that is digital currencies.
Facebook’s Libra was the first real threat posed to governmental control of fiat money. The fact that such a large and prolific company, with global market presence of such scale, could release its own digital currency meant that the possibility of destabilizing fiat currency was quite real. CBDCs are a new iteration of digital currency, one that is controlled by a central government bank utilizing new payment technology (most likely blockchain) to improve payment efficiency while lowering costs. This comes at a time where cash use is rapidly decreasing, and consumers worldwide are opting to do most of their transactions digitally. With crypto interest spiking, central banks are facing the need to supply digital currency or fall behind demand.
Currently, the research and development of CBDCs is being run by 46 monetary authorities worldwide, who are exploring wholesale or retail CBDCs. Retail CBDC is currently being piloted by the People’s Bank of China, the Eastern Caribbean Central Bank, the Bank of Korea, and Sveriges Riksbank. The Sand Dollar in the Bahamas is the only live CBDC project. As a payments path, CBDCs make sense with features such as Distributed Ledger Technology (DLTs) ensuring security of the finance, lower costs and higher efficiency, the ability to be centralized with government-controlled supply, and the ability to track payments efficiently.
Gathering steam, 2021 will see policy makers increasingly embrace the acceleration of CBDCs, as central banks improve their development efforts and move toward creating laws for CBDCs. If these initiatives progress, more countries will start implementing the technology as a supplementary (not necessarily primary) form of money. Leveraging the technology of cryptocurrencies and their corresponding financial assets will no doubt reignite trust between consumers and central banks or government financing.
With cryptocurrencies relying on low consumer trust in banks, fiat currency, and governmental monetary policy, CBDCs will certainly impact the rapid rally of Bitcoin and its counterparts. Despite this, changing central bank law is a process that will take years and include employing broad political discussion to reach a difficult consensus. However, interest in CBDCs will likely continue to compound, and with that, faster results toward legislation.