DECRYPT: How relevant is Central Bank Digital Currency?

While cryptocurrencies had been heading to the moon last year before crashing in the stratosphere somewhere, a quiet entity called Central Bank Digital Currency (CBDC) was gaining interest of the economists and central banks globally. A quick look-up on Google search trends indicates a significantly heightened interest in CBDC over the last one year. CBDC is the next generation of cash. Some people refer to it as ‘Digital cash’ or ‘Programmable Money’. Just like central bank of a country prints banknotes, guarantees them and then circulates them in the economy, the CBDC – a digital twin of the physical bank note – can be digitally minted and released to the economy to perform the same functions as that of cash.

As with any transformative technological innovation, CBDCs too, evoke strong responses from experts. Supporters portray them as an ultimate weapon towards transparency and accountability in Government finances; opponents call them a distributed tool of State surveillance. Truth, perhaps, lies somewhere in the middle. No doubt, CBDC would lead to significantly better targeting of government subsidies and prevent leakages. To get a sense, subsidies in India account for nearly 17 percent of total expenditure for GoI. CBDC could put an end to counterfeit currency and could help curb terror financing and money laundering. Opponents, on the other hand, see them as a tool of State Surveillance. Cash is anonymous and fungible, digital cash is not! Every transaction can be traced back to the user and could pose a risk to privacy.

Some view CBDC as tools of geopolitical dominance as well. US dollar could lose its dominance as the currency of choice for international settlement, once Chinese CBDC is unleashed for cross border settlements. After all, China is a major trading partner for most of the countries and the digital yuan could become an attractive and cost-effective alternative to US dollar for international payment. European Central Banks’s (ECB) 2020 report on Digital Euro, recognises this risk and lists it as one of the five scenario triggers for the launch of Digital Euro.

Chinese Digital Yuan project is going to be the largest CBDC project in the world when fully operational. The only other CBDC is Cambodia’s Bakong project – built on blockchain technology by  Soramitsu of Japan. EU too is catching up fast. Last week (July 14) Reuters reported ECB has decided to roll out the Digital Euro. While the details are still sketchy at this time, there is likely to be a cap on number of digi-euro an individual can hold and traceability would be enforced on transactions above a threshold.

Whether it would be built on a Blockchain platform or not, is still unclear. Optimistic estimates put Euro CBDC roll out at least five years away.It is interesting to note that at least one of the five ECB’s scenario trigger events mentioned in its 2020 report had occurred. The question is, which one?