The idea of Central Bank Digital Currencies (CBDCs) has split the blockchain and digital assets industry into two distinct sections. While one group believes that this idea might encourage adoption of the novel technology into the mainstream, the other suspects that it is simply a method of government to hijack the industry in an attempt to retain control and regulation.
The peculiarity of the nations at the forefront in the push for the actualization of CBDCs attracts some deep thinking towards the goal of this project. China and Russia have been known to enforce strict regulation when it comes to cryptocurrencies. But these are the two nations in advanced stages of actualizing their particular CBDCs.
After completing a pilot testing phase for the digital Yuan in Shenzhen, China is set to continue its testing processes in Beijing. According to reports, this next phase of testing is aimed at developing the financial industry in the nation’s capital. Perhaps, this could come across as the biggest stride so far in the efforts to bring to reality the idea of CBDCs.
Whether good or bad, crypto users and participants in the industry are expressing individual opinions over this matter. Offering opinions over the various possibilities that could arise with the realization of the CBDC innovation.
Time To Replace Dollar Dominance
Sky Guo, CEO of Cypherium believes that CBDCs have become necessary due to rising dollarization, typically occurring in countries exhibiting hyperinflation or instability. He notes that it is one of the reasons why China has entered into the CBDC market so quickly in the first place. Guo compares the CBDC concept to Libra’s original intentions. Therefore, he is of the opinion that CBDCs seek to replace the dollar’s dominance and promote global liquidity. However, he notes that being anchored to a basket of fiat currencies, CBDCs are not unlike global reserve currencies, and could potentially end reliance on the US dollar.
One area of concern for cryptocurrency users is whether the emerging CBDCs would uphold the fundamental properties of cryptocurrencies such as decentralization, privacy, and personal control. According to Guo, with a CBDC, the transfer is both recorded on an immutable blockchain or digital ledger, as well as digitally forwarded to its final destination. However, unless CDBCs are made interoperable, this intrinsic benefit will be lost.
He explains that China’s digital Yuan is a great example of a CBDC created with interoperability in mind. With its two-tier operating architecture, it maximizes resource utilization, fosters collaborative development, avoids financial disintermediation, and strives toward cross-chain compatibility.
In terms of privacy and personal controls, interoperable CBDCs have the advantage of eliminating unnecessary intermediate links and rent-seekers, such as SWIFT and various foreign exchange bureaus, says Guo.
What Values Does CBDC Bring To The Table?
Guo explains that general-purpose, retail-centric CBDCs improve cross-border transfer in terms of efficiency and cost mitigation, exclude unnecessary intermediate links, and enhance the transmission of monetary policy. CBDCs also promote financial inclusion by eliminating the obligation for a traditional bank account, providing a remodelled financial infrastructure to better support unbanked individuals in remote and poverty-stricken regions.
In addition, CBDCs remove existing pain points in our outmoded financial system – namely expensive and inefficient legacy systems such as SWIFT – by reducing transaction costs and credit risks, enabling cheaper remittances, and easing trade.
Despite all the benefits and value offered by CBDCs so far, it is not uhuru yet for the novel financial alternative. Guo notes that while CBDCs hold very few disadvantages when compared to the existing state of play within the global payment infrastructure, they could lead to a number of problems ranging from bottlenecking to financial disintermediation.
However, to overcome these issues, central authorities need to ensure their sovereign designs are compatible and interchangeable with their international counterparts. Guo notes that cross-chain compatibility is essential if CBDCs are to realize their potential and avoid the pitfalls of the traditional payment infrastructure and fiat currency.
A Contrasting View About CBDCs
Mark Binns, CEO of BIGG Digital Assets Inc. does not see the actions of governments and national banks towards achieving the CBDC goals as a positive move for the industry. Binns believes that it is a deliberate effort by the establishment to get into the cryptocurrency industry and take over control.
They say if you can’t beat them, join them. That’s exactly what CBDCs are attempting to do. They want to join the party that is cryptocurrency without actually giving their citizens the privacy and democratic freedom a truly decentralized digital currency provides.
Binn believes that regulation is a key necessity, if cryptocurrency must go mainstream. However, he is not in agreement that such is what CBDCs are all about. In his opinion, CBDCs won’t even give individuals oversight or sovereignty over the value in their wallets, talk more of actual decentralization.
One area where Binn has expressed concern is the perceived duplicity of purpose among the major nations that seem to be prosecuting the idea of CBDCs the most, Russia and China. These are nations with some of the most stringent laws concerning cryptocurrencies, yet, here they are campaigning for state issued digital assets. This is certainly enough to cause eyebrows to be raised.
As it stands, the industry is divided across the lines of those who support the CBDC concept and those who don’t. Whatever the case, the evidence keeps getting clearer that we may be getting close to the reality of active CBDCs in the crypto space. Another reality remains that the digital assets industry is governed by individual adoption capacities. That is something that we hope would extend to every new innovation that emerges in the industry, CBDC inclusive.