In the wake of cryptocurrency derived from the creation of blockchain technology, money in digital form has been the craze. The idea of generating money by facilitating transactions and keeping records on an interconnected worldwide ledger is such an attractive model that in 2008, this exact model was published under the name "Bitcoin Whitepaper," written by a pseudonym "Satoshi Nakamoto." Since then, Bitcoin has been on a rollercoaster as it has been positioned by the market as everything from a money laundering scheme and drug money to the new digital "gold." The race to cryptocurrency regulations by governments all over the world is another battle Bitcoin has to survive to prove itself to the market that it is real money in its concept and increase its adoption rate to become the new money.

More than 100 countries are now looking to exploit the popularity of digital money by introducing a new monetary system called Central Bank Digital Currency (CBDC). Even before the idea of CBDC, instant bank transfers were a common concept practiced by businesses worldwide to shorten the time taken to complete a transaction since the inception of the world wide web. However, the system used is based on credit given by the bank when you deposit money in it, so the bank can use the fractional reserve banking system to lend 90% of deposits to others, essentially creating new money. CBDC are expected to replace physical money, which should hopefully solve the liquidity risk as compared to when money is held by a bank. If it is as good as it sounds, why are you not seeing much of CBDC?

Bahamas Sand Dollar

One of the first countries to introduce CBDC to its citizens was the Bahamas, a collective of islands under one country, in the form of Sand Dollar. It is a digital representation of its national currency, the Bahamian Dollar (B$), that is issued by the Central Bank of The Bahamas. After more than two years of development, the sand dollar is introduced in October 2020. It became one of the prominent payment methods in a trinity system as Bahamians accepted USD, B$, and now its own CBDC, the Sand Dollar. This alternative currency is backed by the same assets that back B$ as an extension. There are now over 300,000 sand dollars circulated, with a low adoption rate due to the complexity of acquiring them and their acceptability by retail markets.

International Monetary Fund (IMF) Concerns

When it comes to money, one of the biggest powers is the IMF. It is an international organization with the goal of providing global economic growth and financial stability by providing policy advice and financial assistance to member countries. The organization said CBDCs may be able to provide greater resilience, greater safety, greater availability, and lower costs than private forms of digital money if they are wisely designed. When compared to unbacked crypto assets, which are by nature volatile, that is unquestionably the case. Furthermore, even stable coins that are better managed and governed might not be able to compete with a central bank digital currency that is both reliable and well-designed.

CBDC Comparison to Block Chain Token

Bitcoin, as the first coin to be introduced on the block chain network, is going to be the common comparison for many. CBDC are issued and controlled by the central bank, while Bitcoin are decentralized and impossible to be controlled by one party without the reaction of others in the network. The rate of inflation can easily be controlled as the central bank has total control over the money flow, while bitcoins are organically reactive to supply-demand mechanisms. Transparency of transactions is also a concern, as the public would be able to view each transaction made on the block chain network, but it is unclear whether the same data would be available in CBDC’s system. The two systems would essentially be competing against each other as the government tried to gain control through promoting CBDC and regulating cryptocurrency while crypto users fought for freedom of transaction.

The Future of CBDC

What would become of CBDC, as many have serious concerns and genuine fears over the control the central bank would have if every citizen were forced to convert physical cash to digital currencies? Even the IMF has expressed concern over the adaptability, financial stability, and privacy of CBDCs. It is a long way before CBDC can be implemented, as the design of the system has countless foreseeable problems down the road, especially trust in infrastructure, hackability, and freedom of transaction. CBDC are bound to be pivotal in the history of money as countries seek and experiment with new digital forms of money with the ultimate goal of lubricating the gears of the economy to run as efficiently as possible. The perfect model of CBDC is far from materializing, and only time will tell whether the project will continue or be dominated and eventually terminated by the rise of cryptocurrencies.