As digital currencies start to gain immense popularity among the masses, Central banks are scrambling for alternatives
“They came, they saw, they conquered.” That phrase is probably going to be used for cryptos in the not-so-distant future. Led by the premier digital coin Bitcoin, the cryptocurrencies have been on a rip in the past 12 months. I have written on previous occasions on how Central banks around the world have been considering issuing their CBDCs — Central Bank Digital Currencies.
Apart from smaller countries like Columbia and the Bahamas floating their digital currencies — Petro & Sand dollar respectively, the most serious attempt to launch a CBDC by a major central bank has come from China. In fact, the Digital Renminbi is already being tested in various cities of the country as we speak. The southwestern Chinese city of Chengdu is handing out another $6M in the latest test of the central bank’s digital currency. This follows the trials already conducted in Beijing, Shenzhen & Suzhou.
Chinese interest in the digital currency space has accelerated plans of other central banks to issue the same — apart from the obviously increased adoption of the decentralized cryptos among the masses. Brazil is eyeing a 2022 launch of its own CBDC as some of the major western economies look into doing the same in the near future. While China’s initial plan was to battle Greenback’s supremacy with its digital currency, the phenomenal growth of cryptos has necessitated & validated this move. How successful is its CBDC eventually, remains to be seen.
With digital payment systems like PayPal putting their weight behind the mainstream cryptos, central banks are racing against time to counter the growing influence of cryptocurrencies. Taking a cue from the Chinese CBDC project, Japanese Finance Minister Taro Aso recently said that CBDCs should be a topic of discussion at the upcoming G7 conference. He also outlined the potential risks stemming from China’s CBDC testing during last year’s G-20 summit. He also pushed for stronger regulations to mitigate the effects of Chinese CBDC on the global monetary market.
Frankly speaking, I think they should be more concerned about the digital disruption that the mainstream cryptos have already set in motion — which has been accelerated by the pandemic in many ways. Japan itself is looking to lunch a digital yen to that effect. Alongside China and Japan, the central Bank of Korea (BoK) announced it will be testing a CBDC. Korean Bank officials predicted that issuing a CBDC would likely cause Korea’s GDP to increase by 3%. Other positive results would be the elimination of printing needs and associated cash transfer fees and delays.
While the boardroom discussions on CBDCs continue, the commoner with access to a smartphone and internet connectivity is loving the opportunity that decentralized cryptos have brought for them. It’s not just a payment mechanism or store of value anymore. Defi platforms are enabling them to invest in the novel space and make money without the intervention of any third party. A completely trustless system that works anywhere, anytime.
Surprisingly, many African countries are seeing the greatest crypto adoption. Having no or a very weak legacy financial infrastructure, to begin with, has enabled them to jump to the new digital reality much faster. Nigeria, where decades of poor economic policies and corruption have caused the decline of their national currency Naira’s decline, the Central Bank of Nigeria banned the banks from servicing crypto exchanges. This is amid a rising crypto adoption in the country — so much so that a Senator tweeted saying that “Bitcoin has made our currency almost useless or valueless.”
On the other side of the continent, the Kenyan central bank showed more willingness to adopt cryptocurrencies. In a historical decision, they decided to switch to use Bitcoin as a Reserve currency in order to resolve growing financial problems in the country. Central Bank Governor cited numerous factors for the adoption — including a shortage of foreign currency reserves, increase velocity of money, and shield Kenya from exploitative loans that threaten the sovereignty of Kenya.
Similarly, European Union, Canada & Argentina have accelerated efforts to develop the digital versions of their fiat currencies. Although the mainstream cryptos have a sword of regulation hanging over their heads, I doubt the regulators can or will be in a position to ban the mainstream cryptos. If it would have been that simple, there was no need to develop digital fiat currencies in the form of CBDCs. I would still prefer the decentralized cryptos considering CBDCs are just a digital version of the same old fiat currency — controlled and run by the government with no privacy. Your choice?
Originally Published on Medium