The world is going digital. Modern innovations are launching fast and there is a need to keep up with them. Business entities (both private and public) are realizing that it is not good to rely on one single source of payment, especially in the era of bank runs, wars, and embargoes.
At least, nobody wants to use and send money the same way our grandparents did.
The idea is that digital money might become legal tender money. Nowadays, many countries are considering the possibility of creating Central Bank Digital Currencies (CBDC) and some even launched them.
WHICH COUNTRIES ARE ALREADY USING CBDC?
The Bahamas, in 2020, was the first state in the world who launched a Central Bank Digital Currency, called the Sand Dollar. Jamaica, Malaysia, Singapore, and Thailand followed the example and became countries with CBDC as legal tender money. Nigeria, China, UAE, Ghana, and India are also examples of CBDC in practice.
CBDC PILOT PROJECT IN RUSSIA
These days, Russia is going through financial and trade sanctions because of the Russo-Ukrainian war. Since it has been embargoed, the Bank of Russia is searching for a solution on how to support foreign trade and cross-border payments.
They consider the answer might lie in a Russian digital ruble powered by the state, in form of CBDC.
The plan was to launch RUS CBDC on April 1, 2023. 13 local banks and some traders will be involved in CBDC trading. General customers are not planning to participate in the first stage of this pilot project.
The whole thing is now delayed because legislation is late and not approved yet so the project will have to wait for a while.
According to the new questionnaire led by Russian no.1 online recruitment company- HeadHunters, the interesting thing is that only 11% of 3000 participants answered that they are ready to get salaries in the digital ruble, which will be under state control.
This result is leading us to the conclusion that there is no big enthusiasm for new payment methods in this country but still, it might be useful to develop them.
However, it remains to be seen how things will go over time.
CBDC IN EUROPE
European Banking Federation (EBF) supports developing a digital money ecosystem for the digital euro, that will be powered by the European Central Bank.
The idea is that the digital euro in the first stage should be open to businesses and governments in the eurozone. In the next step, it might be open to individuals and in the final step to third-party countries, out of European Economic Area.
For now, CBDC in Europe is just an open conversation and some investigations are in process. We will see if and when Europe is ready for the use of centralized digital currencies. Estimates say that it will take more than 5 years to implement CBDC electronic payments.
POTENTIALS AND BENEFITS OF DEVELOPING THE CBDC
Central Bank Digital Currencies are seen as an alternative to traditional money. The truth is, as more people use digital payments, the need for paper money will decrease. It seems that might be a natural process of money evolution. CBDC for sure will have the global economy influence as a monetary revolution.
Another good thing is that its role is to speed up cross-border payments and reduce costs, ensure financial inclusion, lower money laundering, and create new payment methods. It is especially important in the period of economic sanctions and terrorism blooming.
Last, but not least, it will be launched through the local commercial banks so it might underline the role of the private sector.
RISKS AND DISADVANTAGES OF DEVELOPING CBDC SYSTEMS
One of the risks that might appear in this digital money project is that CBDC systems may be the target of hacker attacks. It might result in the loss of all sensitive data and funds, which is real trouble. As the whole system will be developed on digital platforms, the security risk is hard to handle.
The second troublesome disadvantage is the fact that through the CBDC, Central banks will have access to all transaction data and might use it to monitor on the individual level. It will lead to the loss of privacy so governments may have all the control over digital transactions. Sounds like a real threat to human rights.
Also, CBDC development requires big legal system changes. The thing is, that might lead to the potential disagreement of existing laws. Monetary laws are extensive, sensitive, and need time to be adjusted. Not every country is ready to do what needs to be done.
Integration of CBDCs into existing payment systems is considered to be risky and costs a lot.
There are some predictions that it may become financial stability threat by weakening it. Also, CBDC might challenge the crypto rise which might lead to the crypto market instability. Central Bank Digital Currency is seen as a kind of answer to the cryptocurrencies by the states and probably its main purpose is to fight the crypto. Decentralized digital money systems (as the crypto is) don’t fit the state’s economic policies.
For all that reasons, it is extremely important to compare risks with benefits before deciding to implement CBDCs. It is crucial to approach it carefully to prevent any negative effects as much as it is possible.