- BOA analyst says CBDC will change how value is transferred in the future.
- CBDC is the central bank’s alternative to cryptocurrency.
- Senior advisor at the Bank of England says CBDCs are a huge undertaking and would advise central banks “not to do it.”
More than half of central banks are exploring or working on CBDCs. Countries where fiat currencies were favored over their digital counterparts, have warmed up to the idea of having digital currency issued and backed by the central bank.
Eleven countries have launched their CBDC programs, including Jamaica, Nigeria, and the Bahamas, and others like China, India, and Thailand are in the pilot phase.
Bank of America analyst Alkesh Shah wrote in a research report on Tuesday that “CBDCs does not change the definition of money, but will likely change how and when value is transferred over the next 15 years.”
- “CBDCs have the potential to revolutionize global financial systems and may be the most significant technological advancement in the history of money,” he added.
The History of CBDC
While some people might believe that CBDC is a modern idea, studies show they have been around for three decades.
The Bank of Finland launched the Avant smart card, an electronic form of cash, in 1993. It was not an online CBDC but a smart card with a chip that held electronic money.
Avant wanted to create a unified, nationwide electronic cash system, and the commercial banks agreed to contribute to their client bases and ATM networks. Once thriving, it would replace coins. But it was discontinued in 2006, as citizens thought it annoying and expensive- in contrast to debit cards.
After Finland’s Avant smart card came to the Bahamas’ “Project Sand Dollar,” which is now touted as the world’s first CBDC, the pilot program was launched in December 2019, aimed at driving greater financial inclusion and providing complete access to financial services.
“The Sand Dollar project aims for financial inclusion for all residents in The Bahamas by way of access to a central bank digital currency on a modernized technology platform,” CBOB said.
“If you can’t beat them, Copy them.”
Despite being pitched as a decentralized alternative to fiat (paper money), central banks have repeatedly rejected cryptocurrencies. The argument is that the underlying technology does not allow any government to regulate monetary policy.
CBDC, crypto’s competition, mirrors the price of its physical equivalent and is fully controlled by the central bank.
Alberto Muñoz Cabanes, Professor at the Department of Applied Economics and Statistics at UNED, explained it as follows;
“One of the differences between a digital (euro) and a Bitcoin is the way they are issued. While the operations, in the case of the euro, are centralized and the only one that can issue it is the ECB (CBDC), in the case of a Bitcoin, it is different.”
The other side of CBDCs
The benefits and risks of CBDCs depend on their design and issuance. Still, Bank of America expects central banks in developed economies to focus on payment efficiency and those in developing countries to focus on financial inclusion.
The note talked about CBDC risks, highlighting possible competition with bank deposits which could lead to a loss of monetary sovereignty and inequality among countries globally.
“CBDC issuance may not happen for over a decade in some counties, but central banks are expected to ‘adopt technological advances or risk irrelevance over the longer term,” the note added. BOA expects central banks and governments to drive digital-asset innovation with input from the private sector.
While the Bank of America is fully behind developing a CBDC, only some believe that moving from paper to digital money is ideal. Tony Yates, former professor of economics and senior adviser at the Bank of England, shared his concerns on the rollout of CBDCs in Financial Times.
“It is a road that central banks should not be going down,” he wrote. “
Many of the motivations for doing it are suspect. I detect that some are doing it for a vague notion that CBDCs are the future. Others worry that central banks that don’t do a CBDC will lose out in global currency usage.”
“Cryptocurrencies are such bad candidates for money,” he added, addressing the idea of using CBDC to head off threats from crypto. “CBDCs are a huge undertaking. Many of the motivations for doing it are very poor, and there are a lot of risks. I would urge central banks not to do it.”
