2021 was especially productive in terms of promoting national digital currencies. If in the spring of last year, CBDC development projects were developed only in 35 countries, by the end of 2021, this activity was already carried out by 87 states, which account for about 90 percent of global GDP. Moreover, 14 countries (including Russia) are at the stage of CBDC pilot projects, and nine states have already launched their own digital currency. What is the reason for such an interest in this financial instrument?
What caused the interest of governments of different countries in CBDC
CBDC (Central Bank Digital Currency) is the digital currency of the central regulator, which de facto is another type of national currency in addition to its already existing forms: cash and non-cash. What properties does CBDC have, what are its advantages, and why has interest in it risen right now? CBDC is a cryptocurrency completely controlled by the Central Bank. It exists only in the form of a digital code. All the infrastructure critical for CBDC circulation is in the hands of the national regulator. Besides, the Central Bank also has the monopoly for issuing this digital currency.
To understand the issue in more detail, we asked experts about the reasons national governments are interested in launching their own CBDCs.
Reinis Tumovs, investment banker, member of the Board of Directors of Wellcome Keys Worldwide, identified the following reasons:
“Firstly, the issuance of a national digital currency allows Central Banks to maintain the economy’s financial stability against the pressure from actively developing cryptocurrencies. Secondly, the introduction of CBDC fully fits into the growing trend towards the digitalization of the global economy. Thirdly, the active use of their own CBDC makes the economies of developing countries more sustainable and independent. For the states whose financial system is subject to active dollarization, this is of great importance. That is why most of the countries where the CBDC is already in use are in the Caribbean.”
Denis Kurilchik, Co-Founder of CLS Analytics, reminds that СBDC (Central Banks Digital Currencies) is a term that appeared on the Internet not so long ago. It is the digital currency of central banks. The word cryptocurrency is missing here, because, at its core, CBDCs are be based on blockchain technology (which should not be confused with cryptography technology). CBDCs will be completely centralized and transparent, which goes against the very spirit of cryptocurrencies. This means no anonymity and freedom, only total dictate. For the authorities and the bankers’ power, CBDCs will be the top of their power, since sanctions against any digital wallet belonging to a person, even a huge corporation, can be applied in just a few seconds and CBDC can be locked or withdrawn.
The expert adds,
“A striking example is China, which banned the mining of bitcoin and any other cryptocurrencies, as already in some regions they are testing their digital yuan. But before that, I would like to remind, the authorities in China prepared the “soil” with a loyal attitude towards cryptocurrencies. Before the mining ban, a huge proportion of the bitcoin network hashrate was concentrated there. One can’t help recalling the words of German Gref, head of Sberbank, the biggest Russia’s bank, who, in describing what was happening in the crypto markets, mentioned that blockchain technology was unique and had not existed in human history, and that it was one of the few technologies whose development was funded independently through the hype in the crypto market.
“It is also worth recalling the words that German Gref said earlier to Vladimir Putin, ‘I would not ban cryptocurrencies in the Russian Federation, as this will lead to an outflow of specialists employed in the blockchain industry.’ But in fact, there is a possibility that the Russian Federation, after the creation of the digital ruble—and it is already being created—may follow the example of China. But if the so-called mass adoption happens for Bitcoin, then for the Russian Federation, with its colossal potential and the availability of cheap energy resources, it would be absolute stupidity not to mine bitcoin.“
Alexander Sokolov, Vice President for Legal Affairs of the Association of Information Systems Operators and Digital Financial Exchange Operators, believes that the interest of world regulators in issuing their own national digital currency is caused, first of all, by the desire to control cash flows, including the huge layer of individual payments.
The use of CBDC for settlements will allow the central banks of countries to track and control payments in digital currency. Unlike cash or non-cash forms of money, digital currency will remain in a system controlled by the Central Bank, not by commercial or even state-owned, but still separate banks.
The goal of introducing national digital currencies is to increase control, and, as a result, the security of investments and funds of citizens, reduce costs and strengthen the actions of central banks in AML / CFT (anti money laundering and combating financing terrorism).
Yusuf Gayrat, Founder of Narfex, believes that the government's interest in CBDC is obvious, saying,
“The ruling elites have already accepted that the crypto market is actively developing, and there are various assets on the blockchain, and they are not going to disappear. In official documents, they directly indicate that since this market exists and people want to use cryptocurrency, it is better for them to buy a cryptocurrency issued by the state, which is centralized and partially guaranteed by a bank, than some other obscure coins. That is, in fact, CBDCs will be no different from any other cryptocurrencies, and even, most likely, they will not backed up by anything, except, perhaps, the ‘word of honor’ of banks.”
Nikita Kutsenko, Founder of the FINOMEN Investment Academy, notes that CBDC is another form of money along with cash and non-cash funds of the national currency. The very concept of CBDC implies centralized use. It has its own payment system which is served by a Central Bank’s server. All information about the CBDC will be on the server of the Central Bank. However, if a country wants to create reserves in crypto yuan, it will not actually own it. They will simply be provided with an electronic record on the server of the Chinese Central Bank.
Among the reasons states are interested in creating a CBDC, the expert notes the fact that data on all transactions of any person will become available for viewing by the state, and it will be enough just to select the right user. All funds of citizens will be under constant control of Central Banks and actually belong to them.
Dmitry Chernov, the Founder of Armacoin Ltd, says,
“First of all, the introduction of a digital currency is possible in countries where the national currency has a weak [real economy] backing or high inflation. I also continue to insist on introducing national cryptocurrencies in some African and Latin American countries. Also, do not forget about countries such as North Korea. Recently, the UN made a report that North Korea had found a possibility to fight ‘world imperialism’ with cryptocurrencies. In this case, Korean hackers carried out attacks on cryptocurrency exchanges and some blockchain startups and thus withdrew cryptocurrencies, and then developed rockets with these funds. . It was an official statement from the UN. Something similar can be observed in countries that are also under sanctions, such as Iran and Afghanistan. Not so long ago, the US stated that in Iraq they were purchasing weapons for cryptocurrency.”
Yuri Myshinsky, Chairman of the Board of the Digital Transformation Association, notes that CBDC is a digital currency issued by central banks. In fact, this is the most common money, but in digital form. This means that such money can be easily exchanged for cash or non-cash, as well as be paid for goods and services or sent to someone without the participation of bank or payment system intermediaries. Using such money will increase the mobilization capabilities of the economy and the speed of transactions, which will be a convenient complement to systems such as Russia’s System of Fast Paymentts (SBP). Do not forget about the possibilities of cross-border payments in the "state cryptocurrency", and all this is legal. According to the expert, this means that such surrogates as USDT-Tether will be replaced by something more reliable.
Vladislav Akeliev, Development Director of the ECOS cryptocurrency investment platform, says,
“Governments are created in order to serve the interests of the population, and the population of most countries is increasingly using cryptocurrencies. Progressive countries understand that over time, the mass of people using cryptocurrencies will become critical and fiat money will no longer have such value as nowadays. Therefore, governments want to prepare for this moment and offer a blockchain version of the national currency.”
Prospects for the implementation of CBDC
We asked experts about the benefits that the introduction of CBDC in the country's economy offered to citizens, as well as the problems that Central Bank Digital Currencies can solve.
According to Reinis Tumovs, the main advantage of CBDC over other forms of the national currency is an abrupt reduction in the cost of transactions while increasing their speed.
“These effects are achieved by removing an extra link from the chains of payments and transfers, which was previously considered a key one and ensured the stability of any national economy. Until now, all transactions between commercial banks have passed through corresponding accounts of the Central Bank, which costs money and results in substantial commissions for clients. The use of CBDC excludes this link from interbank interaction, making payments and transfers not only faster, but also cheaper.”
According to the expert, any national digital currency relies on a blockchain. Therefore, smart contracts can work with any CBDC. And this will be a real revolution in the economy, as it will make the vast majority of transactions and contractual obligations guaranteed and safe.
In theory, digital currencies and smart contracts can untie even the Gordian knot of complex multi-way real estate transactions, where each next step depends on the successful outcome of the previous one. A well-written smart contract can take into account all the nuances of the property relations of the parties and spare expensive legal and notary support, as well as rented bank safe cells. 100% control over the emission of CBDC and guaranteed traceability of each issued digital ruble, yuan, dollar or naira will make the financial systems of individual countries and entire regions as transparent as possible, which will provide for significant progress in the fight against corruption, as well as increased tax revenues.
Denis Kurilchik is rather skeptical. Concerning the benefits of CBDC, he believes that there will be much more disadvantages than advantages. The expert singles out a positive point, saying,
“One of the advantages will be that it will become much more difficult to secretly embezzle the budget, since all cash flows will be transparent, and it will be possible to quickly track leaks from the budget.”
Yusuf Gayrat believes CBDCs will have the advantage of being processed directly by banks, and it will be easy and affordable to exchange digital assets for fiat. Unlike conventional cryptocurrencies, they will be distributed by the banks and national governments, as well as recommended to citizens for use.
Yuri Myshinsky highlights the following advantages of CBDC:
“Micropayments, bonuses, tipping, payment in transport—all this can be paid without fees or intermediaries, so hundreds of billions of transactions around the world will go faster, billions of dollars will be saved for the benefit of ordinary people, who are citizens of the countries in which CBDC will appear. The income of such financial intermediaries as VISA, MasterCard, Apple Pay, Russia’s Sberbank and the top 20 largest banks will decrease, and the money saved will start working in the real economy and benefiting their owners.”
Alexander Sokolov notes that, firstly, the use of digital currency for payments and transfers should reduce the turnover costs. The digital currency circulates in a system controlled by the Central Bank, which means there is no fee for bank-to-bank transfer. Secondly, there will be transparency and acceleration of transactions. Participants will no longer depend on banking systems, and there will be no payment "freezing".
It is important that the use of digital currency will increase the availability of various financial instruments, products and services for those citizens whose access to conventional banking systems is limited. Take, for example, residents of remote areas or areas with poorly developed infrastructure, including banking. If in a village or town there are two branches of banks or, worse, one bank, the competition is limited. Access to digital currency will fix that.
The introduction of CBDC results in a greater choice and security (since the money is controlled by the Central Bank) and, possibly, access to cheaper loans, with bank fees absent.
With a prudent approach, digital currency solves a whole range of problems:
- The use of digital money controlled by the Central Bank makes payments fast and transparent;
- Competition in the financial market increases, with better offers;
- The security of transactions and their speed increase;
- The control over the use of budgetary funds increases and combating corruption is possible.
Dmitry Chernov says,
“For central banks, cryptocurrencies are evil, the reason being the lack of regulation and the possibility of decentralization. Cryptocurrencies violate the basic concepts of the monetary system. Moreover, no state in the world wants a control of money being implemented or wallets with large balances being published. So it is too early to talk about introducing of digital money in the post-Soviet countries or the leading European powers. Anyway, cryptocurrencies will enter the economy of various states smoothly. From my point of view, cryptocurrencies will be something like a separate type of alternative money that will circulate on a par with state money. Many states will need to lift the ban on cryptocurrencies urgently. It's still an inevitable step. The thing is that I, like many others, would like more control over this sphere, which will eliminate the possibility of creating scam products, as well as heavy speculation and volatility of cryptocurrencies.”
Nikita Kutsenko highlights the following prospects opened up by the integration of CBDC into national economies:
- The Central Bank resolves manipulations and liquidity problems in private banks.
- The visibility of all transactions simplifies the control over income and expenses and counteracts the legalization and laundering of income, as well as it increases the targeted use of funds. It practically excludes corruption.
- The introduction of digital currencies will allow cross-border transfers bypassing SWIFT.
- There is instant transfer and no restrictions on transferring the means of payment;
- A new credit system is possible. When issuing loans, the Central Bank can initially color the money for its designation using a smart contract. And this money cannot be spent except for the list of suppliers on the loan application. With the prices of all kinds of equipment added, corruption in government tenders is immediately excluded.
Such an approach can solve the problem of theft of money, bribes and financial fraud.
Vladislav Akeliev says,
“The main advantage of the massive introduction of CBDC is accessibility. It may sound strange, but a large number of people do not have a bank account but have access to the Internet. CBDCs can solve this problem. Blockchain will also help reduce transfer fees, making transfer more efficient and faster.”
Sergey Khitrov, Founder & CEO of Listing.Help, notes that CBDC is a logical evolution of the current financial system. Such currencies will, on the one hand, significantly reduce the costs of the operation of fiat money, and, on the other hand, increase the transparency of the system.
According to the expert, the biggest potential advantage is programmable spending. So, in the case of the release of a programmable CBDC, spending funds on purposes other than those prescribed will be physically impossible. As a result, programmable money for states can become "transparent" and will allow countries to stop criminal activity, tax evasion and drug trafficking. Examples of such CBDCs can be separate tokens for refugees, the disabled, and the poor. Only these population groups will be able to spend the tokens, and ownership will be determined through the wallet on their smartphone.
Disadvantages of implementing CBDC
But for all its advantages, CBDCs are not deprived of disadvantages. The thing is that any national digital currency by no means is a new type of money flowing into the economy, but only an additional form of existing means of payment. With the introduction of CBDC, the volume of money supply will not change, and there will only be a redistribution between its forms.
Given the advantages of digital national currencies, which we have already discussed in this article, after their appearance, CBDCs can take a significant share of the market. Forecasts vary from country to country, but the consensus estimate of the potentially achievable share of digital currencies in the national structure of payments and transfers is at 30–40 percent.
To delve deeper into the issue, we asked the experts if there were any negative aspects of the implementation of CBDC and how this could affect the adoption and distribution of cryptocurrencies.
As Artur Broks, CEO of NEO FINTECH CORPORATION, told about the implcations of the transition of a significant part of cash and non-cash to digital form.
“At first glance, there is nothing wrong with this, but transferring as little as 30 percent of the money supply available in the economy under the total control of the Central Bank will lead to a shortage of liquidity in commercial banks. This will cause an increase in interest rates on all types of loans, and primarily on mortgage and consumer loans.”
According to the expert, the novelty of this financial instrument can also be attributed to the disadvantages of CBDC. Despite thorough preparation of the infrastructure for launching national digital currencies, it will most likely not be possible to eliminate all of its vulnerabilities and weaknesses, which large hacker associations can take advantage of.
Yusuf Gayrat, Founder of Narfex, says,
“The negative sides are that, firstly, the bank does not bear any responsibility for the tokens issued by it and therefore they are quite risky, and, secondly, their affiliation with a bank gives them high centralization, which is also a pretty big risk for the blockchain technology.”
Denis Kurilchik, Co-Founder of CLS Analytics, believes that there are much more disadvantages of implementing a CBDC than advantages. With the widespread adoption of CBDC, if the political regime becomes less and less similar to a democracy, digital wallets of unloyal citizens can be blocked and charged for various fines. It is important to understand that CBDC is the opposite of the DeFi segment, which gives people freedom, but makes them take responsibility for storing their digital wealth.
The expert concludes that people need to study cryptocurrencies, learn how to use them and take responsibility for keeping their money, since in the 21st century literate people will not be those who can write and read, but those who will have their own digital assets and be able to manage them.
Alexander Sokolov, Vice President for Legal Affairs of the Association of Information System Operators and Digital Financial Asset Exchange Operators, notes that introducing a national digital currency into the economy of any country is a strong shock for the entire financial sector, and primarily for the banking sector.
The expert notes,
“We understand that the banking system is one of the key systems. Commercial banks will have to adapt to new circumstances quickly, and there will be a risk for citizens of the bankruptcy of those banks which will not have time or will be unable to face the new reality. Most likely, the described tough scenario will not happen, since the states themselves are not interested in global upheavals and revolutions in an established market. Central banks will be very careful when introducing digital currencies to their markets. This caution will lead to an increased timing of introducing the new form of money, but will mitigate the negative consequences.
“An example is the digital yuan. China's Central Bank is not making any sudden moves. Everything is going gradually and gently, but irreversibly. It is difficult to predict the impact of national digital currencies on the global cryptocurrency market. We can safely say that there will be some relationship. If users and market participants prefer a digital currency fully regulated and controlled by the state, with state security, to decentralized cryptocurrencies, then an outflow of funds from the cryptocurrency market will occur. However, in our opinion, the cryptocurrency market will survive and win back its positions, since cryptocurrency, first of all, is needed by those who value financial freedom and lack of control.”
Nikita Kutsenko, Founder of the FINOMEN Investment Academy, highlights the following negative points that the massive introduction of CBDC might lead to:
- The existing cyber resilience of the banking sector may not be able to cope with the threats to the new form of currency.
- If all accounts and all control over the turnover are transferred to the Central Bank, bankers essentially remain out of work, in the payment, and maybe in the credit and deposit business.
- The emission of trillions of new rubles could lead to the replacement of existing non-cash or cash funds. Money in digital currency can leave bank accounts.
Roughly speaking, the introduction of CBDC can lead to the complete destruction of the usual model and the disappearance of banks.
The expert says,
“Recently, the world has been building a system of total control over each of us, within which, in a single database, the state will collect all data about our private life. On this basis, a system of social digital rating is easily built, as it is now happening in China. In practice, privacy ceases to exist. It will be easy to punish and restrict us and prohibit something to us, as well as encourage for behavior which is correct from the point of view of the state.”
Sergey Khitrov, Founder & CEO of Listing.Help, emphasizes that it is necessary to keep in mind that the blockchain is more about the openness of data, and not about anonymity. According to the expert, after the introduction of CBDC, all expenses can be in full view. This aspect is considered one of the key drawbacks of CBDC: user spending will become available for government tracking. However, the possibility of privacy in such projects will depend on each specific case of digital currency implementation.
Vladislav Akeliev, Director for Development of the ECOS cryptocurrency investment platform, does not see any negative aspects of CBDC implementation. According to the expert, this will positively affect the popularization of cryptocurrencies and make them more understandable and accessible to everyone.
Yuri Myshinsky, Chairman of the Board of the Digital Transformation Association, says,
“One of the downsides can be the novelty effect. Many people, by mistake or because of scammers, will transfer their digital money to a wrong place. But even this negative moment can be ‘rolled back’. Since the “state cryptocurrency” will be controlled by central banks or authorized structures, it will be much easier to identify fraudulent transactions, return erroneously transferred amounts and block dubious operations. For the "gray" and "shadow" economy, this is very bad, but for ordinary citizens it is good.”
The expert adds that there will be convenient, simple and fast tools for exchanging decentralized cryptocurrencies, such as bitcoin and ether, for a digital ruble, thus it will be possible to shift your "digital stash" into a ruble and make the purchases easily, and vice versa, savings can be converted into long-term investments in digital financial assets.
In fact, the introduction of CBDC means the recognition by the states of a new reality. At first it was not noticed, then it was ignored, then it was frowned at, and at the end of the history, the states themselves began to issue their own digital money related to the national currency.