Central Bank Digital Currency – is it the promise for the future?
With the current economic affairs turbulences, many countries and professional economists have started looking for solutions to the existing problems.
There is no single and easy solution to the current economic problems, but some look more applicable than others. And with a bit of help from technology like blockchain, this can play a crucial role in fixing a broken system.
Explaining Central Bank Digital Currency
If you google CBDC term, you will probably find plenty of articles about it, different approaches, companies, and governments trying to figure out how to approach the hardship. The struggle is real. As with the blockchain strategy, many of us realise that we live in a world where everything is centralised and dependent on so-called trusted third parties, which are no longer so trusted.
A Central Bank Digital Currency (CBDC) is the digital form of a country’s fiat currency that is also a claim on the central bank. Instead of printing money, the central bank issues electronic coins or accounts backed by the full faith and credit of the government.Source: https://www.atlanticcouncil.org/cbdctracker/
It popularised concepts of true ownership and privacy, but also put other ways of financial independence into the limelight. Probably none of the CDBC initiatives will ever reach the same level of functionalities as open source projects like Bitcoin. But to be completely objective, Bitcoin can’t deliver, i.e. the same level of performance measured in terms of transactions per second. But going a bit further, it is good to know that Bitcoin itself can’t, but there are many scaling solutions or even different projects that can complement the mentioned network.
There are pages like “Central Bank Digital Currency Tracker” which help keep an eye on recent developments and show the scale on the world map. It consists of all the news available to the public information with some data analysis and key findings as of May 2022. I do not intend to analyse it on your behalf or to predict whether the EU, USA, Japan, India or any other country will win this race by delivering a usable solution and motivating/forcing others to use it. The thing is, what it will offer to end users, us – customers.
The possible worst-case scenario
In the worst-case scenario, it can be just another implementation of the current financial system, which is based on the technologies from the early 90′, with old processes that take much time and are prone to human error. But what is more dangerous is that such a system, under the hood, can introduce total control over society and monitoring of all aspects of their life. With the recent awakening of the importance of personal data and data as a currency for big tech companies, people are looking for a way to escape. For sure, it won’t be one of the options. It is an undesired system from an aware user perspective, but for governments, it is tempting to create such.
The possible best-case scenario
In the best-case scenario, it will promote financial inclusion and deliver solutions to banking by providing easy and safe access to money for unbanked and underbanked populations. It will increase the efficiency of the payments system at the same time decreasing transaction fees. It will get rid of the middleman and the necessity of trust. Not only that, but it will offer new products through programmable money. I encourage you to do your own research to find much more in terms of potential benefits, but also risks that are connected with it.
What are the greatest challenges?
There are many considerations, like with whom to build such a system, do we have reliable partners that we can rely on, what technologies we should use or what functionalities we need. Finally, can we accomplish it ahead of the others by ourselves? All of these, but not only, are parts of the research. Today we are looking at the technical opportunities with the view of business functionalities – which is good – creating real value and taking what’s best.
There is an understanding amongst engineers working with blockchain technology that the world can’t progress in a revolutionary way of changing everything, discarding existing solutions. It has to be the evolution through deep understanding, finally achieving society’s acceptance.
The burden of introducing a change is also tied to the financial aspects. It is not that developers have to be paid for their job, but more important is that some in front of the steering wheel have no reason to change. They are perfectly fine with their current approach, business model, or so. It also takes time to find a niche for them within this new promise of the existing world.
The other thing is also that today’s public chains, a common name for blockchains like Bitcoin or Ethereum, are worth billions of dollars, which is more in total value than some countries. That is why upgrading Ethereum from one mining approach to the more environment-friendly one took several years of planning, active development and testing.
Technology today is capable of almost everything. It can support charity, fight for justice, solve real-life problems, and be used in the completely opposite way. So there are particular hopes connected to CBDC. It will be interesting to watch how things develop over time.
ABOUT THE AUTHOR
Łukasz Korba, Solutions Architect at Future Processing.
His points of interest are quality assurance and widely understood blockchain technology, from business aspects through societal effects to technical solutions. In addition, he has been working on various projects for clients from financial or sport sectors, which let him consider different aspects and business perspectives. He is also a big gym fan, which helps him to keep his mind free.