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Price predictions

Central banks start taking digital currency seriously


08 Apr 2019   #Bitcoin

Cryptocurrency growth in 2019 did not exactly surprise many, as it was expected ever since the year-long crypto winter started. However, it is rather interesting to see how quickly the crypto trend spreads this time.

It is more clear than ever that cryptocurrencies are here to stay, and there are even talks of a central bank digital currency (CBDC), which would allow banks to distribute digital money and redeemed for fiat currencies. The digital currencies issued by the banks would then be maintained by numerous blockchain networks, which would also bring a number of additional advantages.

The race is on


For pretty much their entire history, cryptocurrencies were mostly frowned upon by central banks, even when cryptos went big in 2017, and especially in 2018, when their prices started dropping. So, what has changed?

Central banks are known for not making risky moves. However, when it comes to crypto, they are unsure of what to do. On the one hand, the crypto sector is still very risky, but on the other, they have a unique opportunity to be among the first to jump on the new form of money and seal their future among the greatest banks in the world. This has sparked a lot of different nations to contribute white papers, start researching, and come up with investigations and reports regarding crypto and blockchain, as well as their potential impact on the banks' operations.

The Bank of England is one example, and it has been looking into the crypto sector ever since 2014 when it started with two seminal papers. British researchers found that the widest adoption is prevented by the incentives models of that time. Their second research piece described different ways in which cryptos would be different than fiat money. This was the report that pointed out the technology's advantages, but both documents noted that it is early to consider replacing fiat currencies with crypto. However, that was the situation five years ago.

Collaboration between banks


Then, a few months ago, in November 2018, several central banks teamed up to issue one massive report on cryptocurrencies and their potential. The team-up included the central banks of Canada, England, and Singapore, and they wanted to see how international payments might be impacted by the introduction of cryptocurrency.

The researchers noted that cross-border payments did not advance together with local payments and that they are extremely slow, often taking days to be processed. Immediately after the report, the industry saw a massive number of CBDC pilots that were researching this subject, as well as a number of others. Most of them were launched on well-established networks, such as Ethereum, Linux Foundation's Hyperledger Fabric, JP Morgan's Quorum, or R3's Corda.

Among the many pilots that emerged during this period, the most promising one came from the Bank of France, which introduced its project back in 2016, and called it Project MADRE. Basically, the bank used blockchain-based solutions to improve an already-existing, but time-consuming, a procedure that requires many banks to constantly be in contact.

They replaced this system with an alternative one, which would be decentralized, and which would automate the old, SEPA Credit Identifier (SCI) management. Instead, the entirety of the work would fall to smart contracts and other blockchain-based programmes that allow automatic transactions between participants under certain previously determined terms.

Additional blockchain use cases for central banks


As mentioned, the concept of CBDC and blockchain has become very tempting to banks around the world, and many of them joined the trend. Brazil, for example, is working on a decentralized information exchange platform called Project PIER.

Then, there is South Africa, who wishes to use CBDC for domestic interbank payments. To achieve this, they are working on a project called Project Khokha. Finally, there is Sweden, which aims to use its own CBDC, e-krona, to become a cashless society.

Clearly, the possibilities already seem endless, and there are numerous use cases for central banks, with the most promising ones including:

The private sector has done countless experiments in an attempt to achieve these, as well as other use cases. Among them, banks of England and France focused on the subject and actually launched pilots. Another group focused on monitoring activity within the private sector and institutions, while the third group decided that it has no interest in the technology at all.

How can CBDC affect retail?


If a CBDC does come out, retail consumers would like to know how the change of the entire monetary system might affect their daily lives. Some among the policymakers believe that a fully-auditable currency is a way to go, but others fear of surveillance and similar downsides of the cashless society.

However, the biggest risk is believed to be the potential for financial exclusion. Cryptocurrencies still have a very small percentage of users, and other demographics might not be capable of adopting such technology. But even if this was not a problem, there is still a concern of the CBDC potential to undermine the stability of commercial banking.

If a large portion of the population decides that CBDC is safer and better then its commercial counterpart, this might cause large volatility and decreased volumes for the latter. This is why each country will have to be careful when approaching the issue, and focus on things like limits regarding the size of transactions, as well as how to deal with interest payments of the CBDC.

Author: Ali Raza. Article For: Crypto-Rating.com

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