It is hard to imagine that the general discourse on central bank digital currencies [CBDCs] two years ago focused mainly 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 around the world examined the potential of issuing a CBDC This year, in fact, everything is different.
2020 started with an important event in the financial world: the World Economic Forum in Davos, where the WEF released a toolkit for policy makers to create CBDCs. According to a recent BIS report, 80% of the world's central banks have already assessed the introduction of CBDC. The news that central banks around the world have been actively researching, studying, testing, etc. came every month this year: Australia, Brazil, Cambodia, Estonia, Jamaica, Kazakhstan, Kenya, Lithuania, Russia, South Korea, Sweden, Thailand, and the United Arabs Emirates, to name a few. Even Japan, one of the main 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 has become certain this year, an important trend has also emerged: central banks in emerging markets tend to issue CBDCs faster than developed countries, which play a more cautious stance . For example, the European Central Bank is discussing the initiation of a reflection phase for a digital euro in the next year, and the introduction of a digital euro is at least a five-year plan. Canada is also developing a CBDC "at a good pace," said Timothy Lane, deputy governor of the Bank of Canada. It will be years before Japan's digital yen is issued, according to a former Bank of Japan official, while in the fall the Bahamas was one of the first countries in the world to officially launch a CBDC. Russia is expected to launch the first pilots 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 DCEP [Digital Currency Electronic Payment] – has a long history, and this year the project has made great strides, although many details are still limited. Concerns about spending a digital dollar before the digital yuan opened the year, and the Digital Dollar Project whitepaper soon followed. The conversation about this technology competition between the two countries was even brought to the US Senate. Some even controversially argued that the 2020 US election sealed China's victory in the CBDC leadership. However, the question of whether it is enough to be the first to start a CBDC to achieve global reserve currency status remains open. Most importantly, China does not intend to replace the U.S. dollar with the digital yuan, and collaboration between the two great powers in developing CBDCs could indeed be the best option for the world.
There may be many reasons for such rapid CBDC development 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.
Connected: How has the COVID-19 pandemic affected the crypto space? Experts answer
And while some raise 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 how we think about money and how it is used by replacing cash, and even become part of a "new money" order. "And with 2020 drawing to a close, Cointelegraph has asked experts in the blockchain and crypto space for their views on the impact of CBDCs on the crypto space and beyond.
How has the CBDC development affected the crypto space this year and what can we expect in 2021?
Brian Behlendorf, Managing Director of Hyperledger:
"The level of skill within central banks' technical teams, particularly regarding CBDCs and their potential and limitations, would amaze many in the crypto community who would accept otherwise. This year, not only were notices dropped and research projects carried out, but also pilots and even some production systems and complementary institutions like the BIS and the OECD that directly dealt with the regulatory issues. An important question is whether these networks are based on accounts or carriers. The latter is what most in the crypto community intuitively understand as "Not your keys, not your coins".
There is a significant risk that regulatory requirements to fight crime and fraud will collide with the freedom to run the software of your choice, reflecting the long struggles to get your cryptography of choice as the first principle, and we might find out that regulators are racing to ban unsecured purses. That would be a bad thing for everyone from the crypto community to CBDCs to all other types of digital assets.
I believe that regulators and central banks will be satisfied with KYC / AML implemented using digital identity systems – probably of a self-sovereign nature often operated on the same networks – to "late-binding" these types of regulatory decisions at this point. making transactions regardless of where keys are kept for convenience. Banks in countries whose regulators understand that better than others will have a competitive advantage, and these may not be the countries we consider most advanced in CBDC use today. "
Brian Brooks, Acting Auditor of Currency for the US Treasury Department of Currency Auditor:
“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 should be achieved.
The United States usually wins when we unleash the power of our innovative, dynamic private sector and the government makes the rules rather than building the products. However, given the intense focus of other countries in this area, I would like to say that because of the important role of the US dollar, we need the United States to move 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 confirms 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 will address the current inefficiencies and shortcomings of today's global order. I am confident that with the increasing digitization of assets, we will turn to the smart economy of the future. "
Denelle Dixon, CEO and Executive Director of the Stellar Development Foundation:
“CBDCs can and will be a huge innovation in our lives, particularly as a financial inclusion tool. This year, the COVID-19 pandemic has shown how effective CBDCs can be. Policy makers, governments and central banks are increasingly realizing that there are ways to better serve citizens and provide fairer access to the financial system in ways that are faster, cheaper and more efficient.
From our conversations with governments around the world studying this technology, it emerges that in 2021 central banks will leverage this year's findings and begin putting CBDCs into practice.
China seems to have a head start on which countries will take the lead, but in less restrictive societies development is likely to be slower and more complicated. There are so many countries exploring the possibilities of CBDCs right now that it is difficult to find a front runner, but the increased focus around the globe makes this an exciting race. "
Dominik Schiener, co-founder of the Iota Foundation:
“CBDCs are being developed in parallel with advances in the crypto space. 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. In contrast, crypto assets are generally controlled by a public algorithm that manages their provision and distribution.
In 2021, central banks will conduct internal tests of CBDCs. However, this is likely to be the case on private or even non-blockchain networks. They can even choose to start their own networks. CBDCs are not hindered by technical hurdles, but by regulatory uncertainties. This will pull the use of CBDCs in the real world after 2021 and until 2022 or even until 2024 and beyond.
China is clearly the leader when it comes to CBDCs. They take technology much more seriously than other countries and seem to have fewer government controls blocking the innovation of blockchain and digital asset technology. "
Emin Gün Sirer, CEO of AvaLabs, Professor at Cornell University, Co-Director of IC3:
“The Libra really got the monetary authorities and central banks going as the existential threat posed by the Facebook network sparked a 'fight or flight' response. Regardless of the catalyst for their efforts, it is undeniably positive to see the gatekeepers of the traditional Financial system recognize the importance of crypto.
China has so far been the clear leader in activating public and private organizations to take advantage of the first mover advantage. It has made significant strides through public accounts and information.
I can think of few clearer motives for US politicians and regulators to accelerate their own efforts to stave off the first real threat to US dollar hegemony in decades. "
Heath Tarbert, Chairman and CEO of the US Commodity Futures Trading Commission:
“We saw that in 2020 many countries touched CBDCs. The COVID-19 pandemic gave rise to a lot of work. We saw a CBDC help with government payments to people who otherwise couldn't access them due to the pandemic. I could imagine that many other countries will dig into the insights of this pandemic and figure out how to move forward with their own CBDC.
Here in the United States, US dollar CBDCs are primarily owned by the Federal Reserve. We are following the work of the Boston Fed and MIT to research 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 do not have to look for a solution only with our government. 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, especially when the latter are distributed ledger peer-to-peer systems. Bitcoin, in particular, has a predetermined monetary policy in which the offer cannot be changed, which makes it far more attractive as a non-governmental store of value compared to a CBDC, which is supposed to replicate the fiat currency of the respective central bank.
The concept of digital currencies used by central banks received considerable attention from central banks in the second half of 2020. We expect there will be increased hype and confusion in 2021 as details about their structure emerge. There are significant challenges to be overcome.
A central bank issuing a CBDC would have to ensure compliance with anti-money laundering and counter-terrorism measures and comply with the political requirements of other supervisory and tax systems.
Some proposals have suggested that central banks manage the core book with an interface through which regulated entities such as banks can connect. However, this hardly achieves the promised efficiency gains that a peer-to-peer general ledger system should have.
When a central bank becomes a purse provider, it risks undermining commercial banks and depriving them of a cheap, stable source of funding such as retail deposits. In times of crisis, this could lead to a run on weaker banks as customers prefer the security of a central bank-supported wallet.
Can they ever be so safe and trustworthy as the ledger will be centralized rather than distributed?
Many of these problems will be difficult and time consuming to solve. Therefore, CBDCs will not be available anytime soon. While they are likely to come with the efficiency gains that digital currencies offer, they are much closer to their underlying fiat currencies and don't offer the diversification benefits and value storage features that digital assets like Bitcoin offer. "
James Wallis, Vice President, Central Bank Exposures 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. In 2021, I expect a world where cryptocurrencies, stablecoins, and CBDCs each have their place in finance and payments, with more specific use cases. As governments continue to test CBDCs and test new technologies in space, it is likely that more regulatory clarity in these jurisdictions will follow suit and be more clearly defined. It is likely that this will 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 for CBDCs lies in the interoperability between CBDCs and between CBDCs and other digital currencies and cryptos. This requires collaboration between central bank networks and private blockchains and encourages innovative use cases. We will see growing demand for a neutral bridge for currencies to provide liquidity and instant settlement for cross-border transactions.
China has spearheaded the fee for CBDCs for retail by connecting to e-commerce platforms. Expect further expansion, including cross-border connections to Macau, Hong Kong and more. We will certainly follow suit in 2021 and test solutions that offer the possibility of working with private companies. Likewise, I think we'll see more CBDCs addressing specific use cases, such as replacing cash like we've seen in Sweden with the e-krona project or the Sand Dollar implementation in the Bahamas that aims to provide inclusive access to regulated payments and other financial services to underserved communities.
To keep up with other CBDC projects and address the issues raised by 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 the US. that is left behind.
Due to the China DC / EP initiative, we expect many more countries / regions to accelerate their CBDC efforts. China may lead, but others will move quickly. Europe is actively examining the feasibility of a digital euro. Several Member States, including France, are currently carrying out experiments. In the US, the Fed is actively working with MIT's Digital Currency Initiative to conduct research related to CBDCs. We think these developments are positive and will result in better designed, better functioning CBDCs.
Many developing countries are already leaders with CBDC applications. It is a natural next step for these governments to develop standardized digital wallets for every citizen. While many developed countries – like the US – 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, Lecturer at Programming Blockchain:
"I don't think it's affecting crypto that much, other than maybe getting more people who don't like surveillance. CBDCs are a way for central banks to control our financial lives more than before.
I suspect China will be one of the first countries as it is very authoritarian. I can imagine that this would cut off banks entirely 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 movement of money. 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 for several years. China's DC / EP approach has already had live trials in four major cities. This year, the Bahamas and Cambodia became the first nations to use digital currencies in their financial infrastructure. And in November, the President of the European Central Bank, Christine Lagarde, signaled that her institution could create a digital currency within years and that policymakers intend to decide in 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.
At a time of rapid advances in the way money moves, there is a recognition 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 be 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 entire crypto space as they adopt many of the same concepts from the cryptocurrency. In that regard, the central bank digital currencies will continue to focus on the broader cryptocurrency and the distributed ledger industry. However, it is likely that they differ in a primary, fundamental way – and that is, they remain centralized rather than taking into account the public, transparent nature of cryptocurrencies.
In 2021, small countries will be issuing their first digital currencies – likely using private, approved ledgers – and we will continue to see progress from China on the digital yuan, where it appears to have a pioneering advantage over other digital currencies. "
Paul Brody, main 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 makes use of this token currency. It has a clear roadmap, it has conducted tests, and it also has clear policy objectives associated with the implementation of the electronic payments in digital currency program.
Although other countries mostly only study the concept, experiments are also being carried out in practice with the use of stable coins in smart contracts for Ethereum. This is a real-life laboratory of how CBDCs are likely to be used when they are made available to the public, and I think the Bank of England's decision to put a legal framework for them in place is a really good step to take with understanding to begin and manage the likely impact of CBDCs. "
Roger Ver, CEO of Bitcoin.com:
"That's the fun part of being in this ecosystem: we don't know where the next big thing is coming from. It could be from a nation-state anywhere in the world, from a Facebook or a lone wolf like Satoshi Nakamoto. We just know that the pace of innovation will increase. "
Samson Mow, Blockstream's Chief Strategy Officer:
"CBDCs don't compete with Bitcoin. They compete with stable coins and commercial banks.
China is definitely a leader in CBDC development and I would expect other nations to try to follow quickly. We also saw the Bermuda government experiment with a stimulus token issued on the Liquid Network, which is very exciting. "
Sheila Warren, Head 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 crypto. When we released our CBDC Policy-Maker Toolkit in January, these public conversations weren't that important.
This year things start to move in production and the results of the experiments become more and more evident. The emerging economies continued to take the lead in experiments and deployments – with interesting work from 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 coming out on a limited scale over the next year or two. 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 DeFi world. "
Vinny Lingham, CEO of Civic:
“China will take the lead in the central bank's digital currencies early on. It was clear that it wanted to be the global unit of account. At some point in the future, China and the US will lead the world on this front.
Regarding the impact on the crypto space, it should be noted that CBDCs are fundamentally different from crypto. A key promise made by Bitcoin is that it is apolitical, and that is important to many people who use Bitcoin. They don't want the currency to be open to manipulation by the state. Governments cannot by nature be apolitical. So CBDCs and crypto can co-exist, but they will never be the same.
Also, in my opinion, there is less than a 1% chance that a government-approved fork would replace Bitcoin. And should that ever happen, it would likely strengthen Bitcoin. "
These quotes have been edited and compressed.
The views, thoughts, and opinions expressed are the sole rights of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.