It is hard to imagine that the general discourse on central bank digital currencies (CBDCs) two years ago focused primarily on the potential and possibility of their issuance. Even in 2019, the question arose whether we need state cryptocurrencies. According to a survey published by the Bank for International Settlements in early 2019, only 70% of central banks worldwide examined the potential of issuing a CBDC. But this year everything is really different.
2020 began with an important event in the financial world: the World Economic Forum (WEF) in Davos, where The WEF has released a toolkit for lawmakers to create CBDC. According to a recent BIS report, 80% of the world’s central banks have already evaluated the introduction of CBDC. The news that central banks around the world had started research, studies, testing, etc. came every month this year: Australia, Brazil, Cambodia, Estonia, Jamaica, Kazakhstan, Kenya, Lithuania, Russia, South Korea, Sweden, Thailand and the United Arab Emirates, to name a few. Even Japan, one of the leading critics of the central bank’s digital currency two years ago, changed its mind.
While the inevitability that the central bank digital currency will become a global phenomenon came true this year, there is one important trend that has also become apparent: Emerging market central banks are moving faster towards CBDC issuance than developed countries, which are more cautious. For example, the European Central Bank is discussing the introduction of a reflection period for a digital euro in the next year, and the introduction of a digital euro is a plan of at least five years. Canada is also developing a CBDC at a “good pace,” said Timothy Lane, deputy governor of the Bank of Canada. According to a former Bank of Japan official, it will be years before Japan’s digital yen is issued. This fall, the Bahamas became one of the first countries in the world to officially introduce a CBDC. Russia is expected to launch the first pilot programs for its digital ruble next year.
The situation is very different in the world’s major economies, the USA and China, whose technological competition has led to a “digital cold war”. The Chinese Digital Yuan Project, known as Digital Currency Electronic Payment (DCEP), has been around for years, and this year the project has made great strides, although many details are still limited. Concerns about issuing a digital dollar prior to the opening of the digital yuan in the year and soon followed by the publication of the Digital Dollar Project’s white paper. The conversation about this technological competition between the two countries was even held before the US Senate. Some even argued controversially about it The 2020 US election sealed China’s victory in the leadership of the CBDC. However, the question of whether being the first to launch a CBDC is enough to achieve global reserve currency status remains open. Most importantly, China does not intend to replace the US dollar with the digital yuan, and cooperation between the two great powers to develop the CBDC may indeed be the best option for the world.
There may be many reasons for such rapid development of the CBDC around the world, but the main one is the COVID-19 pandemic highlighted by the European Central Bank, the Bank for International Settlements and many other experts. The coronavirus pandemic, which has been driving the technological development of humankind for at least 20 years, has become a serious challenge for the global economy, and CBDCs are increasingly viewed as an appropriate tool to remedy the financial system.
While some have raised serious privacy concerns about CBDCs, stressing that it would be a step towards a more centralized system, the potential of national digital currencies is sure to become our current reality, not just the financial system of the future.. CBDCs are an important step in the evolution of the financial system as they can improve bank accounts, completely transform traditional finances, reshape the world economy, change our perception of money and how it is used by replacing cash, and even become part of a “new currency order”. And with the near end of 2020, Cointelegraph reached out to blockchain and crypto experts to discuss their views on the impact of CBDCs in the crypto space and beyond.
How has the development of CBDCs affected the crypto universe this year and what can we expect in 2021?
Brian Behlendorf, CEO of Hyperledger:
“The level of competition within central banks’ technical teams, particularly regarding CBDCs and their potential and limitations, would surprise many in the crypto community who would assume otherwise. This year, not only have runways and dedicated research projects decreased, but pilots and even some production systems and complementary institutions like the BIS and the OECD have dealt directly with regulatory issues. A key question is whether these networks will be account-based or carrier-based. The latter is what most crypto communities intuitively understand as “Not your keys, not your coins”.
There is a significant risk that regulatory requirements to combat crime and fraud will collide with the freedom to run the software of your choice. Borrowing from the long struggles to execute the crypto of your choice as the first principle, we may find that regulators are pushing to ban unprotected wallets. That would be a bad thing for everyone from the crypto community to CBDCs and all other types of digital assets.
I think regulators and central banks will be happy with the implementation of KYC / AML using digital identity systems, probably the self-sovereign kind that often operate on the same networks to make such regulatory decisions. “Late bindings” at transaction time, regardless of where the keys are kept. Banks in countries whose regulators understand that better than others will have a competitive advantage and these may not be the countries we believe today are the most advanced in adopting CBDC. “
Brian Brooks, Acting Currency Auditor at the Treasury Department’s Office:
“Central bank digital currencies are one of the most important topics currently being discussed. The question at this point is not whether, but how the digitization of the dollar and other fiat currencies can be achieved.
America in general wins if we unleash the power of our innovative and dynamic private sector and the government makes the rules instead of making the products. But anyway, Given the strong focus of other countries in this area, let me say that because of the important role played by the US dollar, we need the United States to take a step forward in this area. “
Da Hongfei, Founder of Neo, Founder and CEO of Onchain:
“It will certainly be a boon to the blockchain space as the rapid development of CBDCs further affirms the integral role blockchain will play in building tomorrow’s world. I believe that in the face of increasing blockchain innovation, countries around the world are increasingly realizing the need to build a truly digital future that addresses the current inefficiencies and shortcomings of the current global order.. With the increasing digitization of assets, I am confident that we will turn to the smart economy of the future. “
Denelle Dixon, CEO and CEO of the Stellar Development Foundation:
“CBDCs can and will be a great innovation in our lives, especially as a financial inclusion tool. This year, The COVID-19 pandemic has highlighted the impact CBDCs could have. Policy makers, governments and central banks are increasingly realizing that there are ways to better serve citizens and provide faster, cheaper and more efficient access to the financial system.
Based on our discussions with governments around the world studying this technology, I believe that in 2021 central banks will use what we learned from this year and start putting CBDCs into practice.
Which countries will take the initiative? China seems to have a head start, but development is likely to be slower and more complicated in less restrictive societies. There are so many countries currently exploring the possibilities of CBDC that it is difficult to pick a favorite, but the increased focus on the world makes it an exciting career. “
Dominik Schiener, co-founder of the Iota Foundation:
“The CBDCs will evolve in parallel with advances in the crypto universe. Although CBDCs are very interesting, they treat a completely different use case than well-known crypto assets such as Bitcoin or Iota. They are issued and supported by a central bank that has the authority to print new capital at will. Nor are they necessarily intended for consumers or ordinary people. Vice versa, Crypto assets are generally controlled by a public algorithm that manages their provision and distribution.
In 2021, central banks will conduct internal CBDC tests. However, you will likely do this on private networks or even without blockchains. You can even choose to start your own networks. CBDCs are not hindered by technical hurdles, but by regulatory uncertainties. This will delay the use of CBDC in the real world beyond 2021 and until 2022 or even 2024 and beyond.
China is clearly a leader when it comes to CBDC. They take technology more seriously than other countries and appear to have fewer regulatory controls blocking innovation through blockchain technology and digital assets. “
Emin Gün Sirer, Managing Director of AvaLabs, Professor at Cornell University, Co-Director of IC3:
“The Libra really got the monetary authorities and central banks moving as the existential threat posed by the Facebook network sparked a ‘fight or flight’ response. Regardless of the catalyst for your efforts, it is undeniably positive to see that the gatekeepers of the traditional financial system are realizing the importance of cryptocurrencies.
China has so far been the clear leader in activating public and private organizations to try to take advantage of the first step. Significant progress has been made at the level of public accounts and information.
I can think of clearer motives for US politicians and regulators to accelerate their own efforts and defend themselves against the first real threat to US dollar hegemony in decades. “
Heath Tarbert, Chairman and CEO of the US Commodities Futures Trading Commission:
“We saw that in 2020 many countries touched CBDC. The COVID-19 pandemic gave rise to a lot of work. We saw a CBDC help with government payments to people who otherwise would not have access to them due to the pandemic. I imagine that many other countries will analyze what was learned during this pandemic and figure out how to move forward with their own CBDC.
Here in the United States, US dollar CBDCs are primarily a Federal Reserve responsibility. We are following the work of the Boston Fed and MIT in researching CBDC design and technology. We are also encouraged by the work of the BIS Innovation Center for CBDCs.
My personal belief is that America must lead here. However, we shouldn’t just turn to our government for a solution. The private sector is moving faster; Partnering with him while we set a regulatory resolution is probably the best way to get things moving. “
James Butterfill, Investment Strategist at CoinShares:
“We believe that CBDCs will most likely not replace crypto-assets like Bitcoin because of their inherent differences, largely because the latter is a peer-to-peer distributed record keeping system. Bitcoin, in particular, has a predetermined monetary policy in which the supply cannot be changed, which makes it much more attractive as a non-government store of value compared to a CBDC, which is supposed to replicate the fiat currency of its respective central bank.
The concept of central bank digital currencies received significant attention from central banks in the second half of 2020. We anticipate that there will be excitement and confusion in 2021 as details about its structure emerge. There are significant challenges to be overcome.
A central bank issuing a CBDC would have to ensure that the fight against money laundering and terrorist financing is complied with, and comply with the political requirements of other regulatory and tax regulations.
Some proposals have suggested that central banks manage the ledger with an interface that regulated entities such as banks can use to connectHowever, this hardly achieves the promised efficiency gains that a peer-to-peer registration system should have.
When a central bank becomes a purse provider, there is a risk that commercial banks will be emptied and deprived of a cheap and stable source of funding such as retail deposits.. In times of crisis, this could panic among weaker banks as customers prefer the security of a central bank-supported wallet.
Can they be as safe and reliable as the general ledger is centralized rather than distributed?
Many of these problems will be difficult and time consuming to solve and therefore CBDCs will not be available anytime soon. While they are likely to get the efficiency gains that digital currencies offer, they are much closer to their underlying fiat currencies without offering the diversification benefits and value storage features that digital assets like Bitcoin offer. “
James Wallis, vice president of central bank engagement at Ripple:
“National CBDCs have been a positive development for the crypto space and have confirmed at the highest level that digital currencies are the future.. I hope to see a world in 2021 where cryptocurrencies, stablecoins and CBDCs have their place in finance and payments, with more specific use cases. As governments continue to test CBDCs and test new technology in space, it is likely that greater regulatory clarity in these jurisdictions will follow suit and become clearer. This is likely to affect regulators in other countries that have adopted cryptocurrencies and blockchain technology more slowly.
The main focus of the CBDCs in 2020 was on domestic solutions. The real potential of CBDCs lies in the interoperability between CBDCs and other digital currencies and cryptocurrencies. This requires collaboration between central bank networks and private blockchains and encourages innovative use cases.. We will see growing demand for a currency neutral bridge that provides liquidity and instant settlement for cross-border transactions.
China has spearheaded the fee for retail CBDCs by linking to e-commerce platforms. Further expansion is expected, including cross-border connections to Macau, Hong Kong and more. We will no doubt see others follow suit in 2021 and test solutions that offer the opportunity to work with private companies. Similar, I think we’ll see more CBDCs addressing specific use cases like replacing cash like we’ve seen in Sweden with the e-krona project or implementing Sand Dollar in the Bahamas, the one inclusive To provide access to regulated payments and other financial services for underserved communities.
To keep up with other CBDC projects and address the issues raised with the COVID-19 pandemic, we should expect more central banks to accelerate their CBDC initiatives, including the EU, South Africa, Brazil, the UK and hopefully America too, that was left behind.
With China’s DC / EP initiative, we hope that many more countries / regions will accelerate their CBDC efforts. China may be in the lead, but others will move quickly. Europe is actively studying the feasibility of a digital euro and several Member States, including France, are currently experimenting. In the United States, the Fed is actively working with the MIT Digital Currency Initiative to conduct research related to CBDCs. We believe these developments are positive and will result in better designed and better performing CBDCs.
Many developing countries are already leaders with CBDC applications. The next natural step is for these governments to develop standardized digital wallets for all citizens. While many developed countries like the United States are still debating the benefits of CBDCs. It is unlikely that something of this magnitude will be used and adopted by citizens in the next five or more years. “
Jimmy Song, programming blockchain teacher:
“I think it doesn’t affect crypto as much, other than maybe attracting more people who don’t like surveillance. CBDCs are a way for central banks to control our financial lives more than they already do.
I suspect China will be one of the first as it is very authoritarian. I can imagine that this will completely eliminate the banks and give every citizen a direct bank account at the central bank. “
Joseph Lubin, Co-Founder of Ethereum, Founder of ConsenSys:
“When ConsenSys published its white paper ‘Central Banks and the Future of Digital Money’ at the World Economic Forum in January, the background was a dramatic change in monetary mechanics. Since then, The COVID-19 pandemic has only accelerated technological change in the way money moves. Privately issued stablecoins have nearly doubled since the start of the year, now with a market cap of $ 23 billion.
It’s really interesting what’s going on in this room, which has actually been going on for several years. China’s DC / EP approach had trials underway in four major cities. This year, The Bahamas and Cambodia were the first nations to use digital currencies in their financial infrastructure. And in November, the President of the European Central Bank, Christine Lagarde, pointed out that her institution could create a digital currency in a few years and that policy makers intend to decide by mid-2021 whether they want to prepare for a possible launch. ConsenSys also announced four separate CBDC projects with the Hong Kong Monetary Authority, Societe Generale-Forge, Bank of Thailand and Reserve Bank of Australia in the third quarter of this year.
In this age of rapid advancement in the way money moves, the realization is that we need systems to work and trade with one another. The motives for CBDC around the world will be different, in some cases for better control and in other countries for more efficient systems. Banks have monopolies and will compete for reserve status, and we will deal with stablecoin regulation. However, I firmly believe that blockchain-based systems can become the foundation for more trustworthy collaboration. “
Mance Harmon, Co-Founder and CEO of Hedera Hashgraph and Swirlds Inc .:
“CBDCs are essentially a validation of the general crypto universe as they adopt many of the same concepts from cryptocurrency. In this sense, Central bank digital currencies will continue to highlight the broader cryptocurrency industry and distributed ledgers. It is likely, however, that they differ in primary and fundamental ways, and that is to say that they remain central rather than taking into account the public and transparent nature of cryptocurrencies.
In 2021, small countries will issue their first digital currencies, likely using private and licensed ledgers, and we will continue to see progress in China over the digital yuan, where it appears to have a pioneering advantage over other digital currencies. “.
Paul Brody, Director and Global Innovation Leader for Blockchain Technology at Ernst Young:
“When it comes to central bank digital currencies, China is already in the lead and will likely stay in that position for the foreseeable future if it implements this token currency. It has a clear roadmap, has conducted tests and also has clear policy objectives related to the implementation of the electronic payments in digital currencies program.
Although other countries are mostly just exploring the concept, in practice stable coins continue to be used in smart contracts for Ethereum. This is a real-life lab on how CBDCs are likely to be used once they are made available to the public, and I think the Bank of England’s decision to put a regulatory framework for them in place is a really good step to take with that Understanding to begin. and manage the potential impact of CBDCs. “
Roger Ver, CEO of Bitcoin.com:
“It’s fun to be in this ecosystem – we don’t know where the next big thing is coming from. It could have come from a nation-state anywhere in the world, from a Facebook or a lone wolf like Satoshi Nakamoto. We only know that the pace of innovation will increase. “
Samson Mow, Blockstream’s Chief Strategy Officer:
“CBDCs don’t compete with Bitcoin. You compete with stable coins and commercial banks.
China is definitely a leader in CBDC development, and I hope other nations will try to quickly follow suit. We also saw the Bermuda government experiment with a stimulus token issued on Liquid Network, which is very exciting. “
Sheila Warren, Director of Blockchain and DLT at the World Economic Forum:
“We have certainly seen increased attention for the digital currency area in 2020, especially from regulators and economists, which is slowly moving us to normalize cryptocurrencies. In contrast to when we launched our Creator Toolkit as part of the CBDC policy in January these public discussions were not yet so important.
This year things start to move towards production and the results of the experiments are getting clearer and clearer.. The emerging economies continued to conduct experiments and missions of interesting work in Bermuda, the Eastern Caribbean and Cambodia, and of course China remains the country to watch. “
Todd Morakis, Co-Founder and Partner at JST Capital:
“There will likely be a number of CBDCs with limited releases over the next two years. We also expect continued growth in the number of banks issuing their own digitized currencies, with a particular focus on developing parts of the world.
We believe 2021 will be an interesting year for the adoption of digitized currencies and how that intersects with the evolving world of DeFi. “
Vinny Lingham, CEO of Civic:
“China will take the lead in central bank digital currencies. It has become clear that it wants to be the global unit of account. At some point in the future, China and the United States will duel to become world leaders on this front.
Regarding the impact on the crypto space, it should be noted that CBDCs are fundamentally different from cryptocurrencies. A key promise made by Bitcoin is that it is not political, and that is important to many of the people who use Bitcoin. They don’t want the currency to be open to manipulation by the state. Governments cannot by nature be apolitical. Hence, CBDCs and cryptocurrencies can co-exist, but they will never be the same again.
I also think the chance that a government approved fork will replace Bitcoin is less than 1%. And should that ever happen, it would likely strengthen Bitcoin. “
These quotes have been edited and summarized.
The views, thoughts, and opinions expressed herein belong solely to the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.