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2021 is Going to be the Year of CBDCs

By January 7, 2021March 21st, 20224 minute read

The dawn of the decade is all set for a new financial era as the world sees CBDCs (Central Bank Digital Currencies) as a prime agenda in almost all international financial policy conversations. Several nations and international organizations have either announced a new study or a pilot project or else are exploring the scope of CBDCs under their jurisdiction. A Goldman Sach Report even expects CBDCs to account for 15% of the total consumption payments in 10 years. Used to stablecoins like Tether, could the crypto market soon evolve into one that prefers CBDCs?

China was the first nation to announce its digital currency a few years ago, while recently, the Bahamas became one of the first nations to launch its own CBDC called ‘Sand Dollar’.  China has begun testing its Digital Currency Electronic Payment (DCEP) with 50,000 citizen users first. Hong Kong, Thailand, and Australia have also joined the race to develop central banks’ digital currencies (CBDC). Venezuela now technically has its own cryptocurrency called the ‘Petro.’ 

At this pace, the time may not be far when CBDCs become the norm.

What are CBDCs?

A CBDC or Central Bank Digital Currency uses a blockchain-based token to represent the digital form of a fiat currency of a particular nation (or region). ~Investopedia

A CBDC is designed to use DLT (Distributed Ledger Technology) and digital tokenization for expressing a country’s official currency. CBDCs are centralized and regulated by the monetary authority and government of a country, unlike decentralized cryptocurrencies. Banks are the only institutions that operate and control digital currencies to be used as a legal tender in digital payments.

Source – currency.com

CBDCs will have a long-term impact on the global fintech and electronic payment market with features such as anonymity, ease of use, financial inclusion, and offline payments. They will challenge these systems by removing the intermediaries and introducing digital wallets backed by blockchain tech. 

At WazirX, we can speculate that CBDCs hold the potential to replace physical cash and can transform the crypto trading scenario once and for all. The success of CBDCs lies in government support and promotion as a substitute for cash.

There are currently several governments around the globe testing the viability of issuing such centralized digital legal tender. CBDCs might face some resistance in the form of:

  • Competition from the existing systems, 
  • Security concerns such as double-spending, theft, etc.
  • And, the DLT is still an immature technology wanting the trust of the masses.

CBDCs: A Great Leap Forward

2021 seems to be the year of CBDCs, as COVID seems to have exposed the roadblocks and limitations the current banking system is suffering from. For example, during the pandemic, stimulus checks took months to reach the recipients. 

With CBDCs, these transactions could be enabled rapidly and put directly into the citizens’ hands in a matter of seconds. Indeed, an early US Stimulus Bill draft proposed stimulus payments via a ‘Digital Dollar’

The development of CBDCs will lead to greater innovations sanctioning faster business operations globally. In the wake of the digital shift, market participants accelerated post-pandemic and no longer intend to tolerate delays in settlement of transactions. Central Banks are under pressure to explore digital money more seriously for fear of being left out too. 

Moreover, the current industry participants, financial institutions, and governments feel that the potential in applications of blockchain, Bitcoin, and cryptos in the digital space is vast. Distributed Ledger Technology (DLT) has reached a stage of maturity where it has moved beyond the proof-of-concept stage, and the advent of CBDCs is possible. As such, each one of them wants to grab the first-mover advantage while exploring the use cases of the DLT. To remain competitive in the international market, institutions like banks, brokers, asset managers, and Fortune 500 companies need to ensure that the delivery and payment happen on the same day for immediate funds’ availability

Traditional financial systems are centralized, lagging, and prone to security threats. CBDCs can help remove several shortcomings of the existing systems, improving access, cost efficiency, transparency, and security. In short, CBDCs can pave the road for the digitization of economies in the coming future.

Global financial value transfer functions like cross-border payments can be modernized using CBDCs.  A Bank for International Settlements (BIS) survey showed nearly 90% of the central banks were engaged in or plan to commence CBCD development.  

It can also help central banks overcome huge infrastructure costs involved in the banking sector and lend greater focus on the tools necessary to combat illegal financing and other money laundering practices. 

The experiments with blockchain technology and cryptos have just begun. CBDCs can be the programmable money that could be coded to serve specific functionalities. For instance, think of a US Dollar or INR programmable only to be used as a mode of investment or to be used in the insurance sphere. 

Picture a case where a person receives this programmed money as his insurance claim. Now the money could only be used foto fix the car and not buy a vacation or dining at a restaurant! 

The possibilities are immense! And so is the global interest in CBDCs. 
CBDCs can bring in a quite likable efficiency in our financial lives and can be integrated into the existing infrastructure elegantly without having people to unlearn and relearn their monetary and financial habits. We, at WazirX, anxiously await the dawn of the digital era with CBDCs.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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