Cash to Crypto: Currency Revolution🕺🏽

Greetings, mates!

The past week in the banking world was a rollercoaster to say this least. In case you missed it, we wrote a post covering the bank failure of Silicon Valley Bank (SVB) last week. Since then, SVB has re-opened for business and regained a good portion of their business, but it still begs the question of how a bank failure of this magnitude (the second largest one in history!) could happen given their position as a trusted partner in the tech ecosystem? It also led us to consider what this means for the future of finance and the way we store and invest our money. Some people believe strongly that centralized banks are necessary, while others are all for decentralized finance. But is there a happy medium?

Well, when Kendall was in London for Wharton’s Web3 course abroad, she learned about Central Bank Digital Currencies (CBDCs). Pictured: Kendall + her classmates! Not pictured: CBDCs 😂

While doing research for a presentation at Barclays on CBDCs, she learned that banks across the world are exploring this as an option for their financial systems. With so many countries researching ways to transition to digital currencies that are backed by banks, the topic seems especially interesting given that it has elements of centralization and decentralization. In this post, we’ll break down what exactly CBDCs are and why this matters to you. Let’s get it!

Introducing Central Bank Digital Currencies (CBDCs)

According to Investopedia, CBDCs are “a form of digital currency that is issued by a country's central bank. They are similar to cryptocurrencies, except their value is fixed by the central bank and equivalent to the country's fiat currency.” The easiest way to think of them is the digital form of your country’s local currency. So that digital $10 bill you have in CBDC form would have exactly the same value – and be as stable – as a $10 bill.

While it may be the first time you’ve heard of CBDCs (don’t worry - we guarantee you aren’t alone), it’s far from a novel concept. Bank of Finland launched the first one in 1993, with the Avant smart card, an electronic form of cash, that lasted until the early 2000s. But don’t fret, a handful of other countries launched their own CBDCs:

• The Bahamas: In October 2020, the Sand Dollar became the first CBDC in the world to go beyond the pilot stage and achieve an official launch

• Nigeria: In October 2021, Nigeria launched Africa’s first digital currency, the eNaira, which is projected to increase to 8 million users following its launch of phase 2 in August 2022

• Jamaica: On December 31, 2021, the Bank of Jamaica announced that it had successfully completed the trial of its retail (CBDC), the JAM-DEX

And that’s just the tip of the iceberg - according to the Atlantic Council, we can expect over 20 countries to make strides towards piloting CBDCs. Countries include, but are not limited to, Australia, Thailand, Brazil, India, South Korea and Russia.

Why do countries want to implement CBDCs?

It may still seem like a far-fetched idea, but imagine if the U.S. had “Americoin” instead of the U.S. dollar. What would this mean for us as citizens, and why would the government want to implement this? Below are six reasons why central banks are exploring CBDCs:

1. Financial inclusion: CBDCs would make it easier for people who don't have access to traditional banking services to participate in the financial system.

1. Enhanced security: They could provide better security features than cash or traditional payment systems, such as the ability to prevent fraud and money laundering.

1. Greater transparency: Blockchain technology allows greater transparency into financial transactions, which could help to prevent illegal activities and increase trust in the financial system.

1. Increased efficiency: CBDCs would reduce the time and cost associated with traditional payment systems.

1. Reduced transaction costs: They also reduce transaction costs for businesses and consumers, which could lead to increased economic activity.

1. Improved monetary policy: CBDCs give central banks more direct control over the money supply, which could help them to better implement monetary policy.

Some people aren’t on board with CBDCs though. Here’s why. 

Even with all of the benefits, there are risks that must be taken into account as banks create CBDCs. Below are four of the key risks that we have to get right in order for this to work and be trusted by the general public:

1. Cybersecurity risks: This makes banks  vulnerable to cyber attacks, which could potentially result in the loss or theft of digital currency. These central banks would need to invest heavily in strong cybersecurity measures to protect against this.

1. Privacy concerns: CBDCs could potentially raise privacy concerns, as central banks would have access to detailed information about financial transactions. Central banks would need to ensure that appropriate privacy protections are in place.

1. Operational risks: CBDCs would require significant investments in technology and infrastructure, and there could be operational risks associated with implementing and maintaining these systems.

1. Legal and regulatory challenges: The introduction of CBDCs could raise legal and regulatory challenges, particularly with regard to issues such as taxation and anti-money laundering regulations.

“Why do I need to care about CBDCS?? I just figured out crypto!!” - said a W3FTC reader, probably 

We hear you, there’s a lot going on in the digital payment space! While things have been a little quieter in the world of crypto, CBDCs have been gaining traction and its important to pay attention to for a few reasons:

• It’s becoming a hot topic: the numbers never lie - if you see below, research and piloting of CBDCs have been at an all-time high over the past year with few projects actually failing or being canceled 

• It’s political: politicians around the world know that they cannot avoid digital currencies anymore, whether CBDCs or crypto. In fact, Florida Governor, Ron DeSantis, entered the debate proposing a law to ban CBDCs. It wouldn’t come as a surprise to us that CBDCs are involved in the next election, whether it’s an unsolicited ad or a debate topic

• It’s centralized: the banking system as we know it today does not love one of the core values of Web3 - decentralization. While we at W3FTC are all about empowering the user to control their assets, CBDCs introduce a middle man who have the power, but also promise stability, safety, and transparency to a growing and kinda confusing world of digital currencies

And that’s a wrap on CBDCs! Whether you found this concept interesting or the jury is still out for you on digital assets, we’re excited to see innovation in the space from some of the more institutional financial players. Will they gain wide adoption and more traction than some of these larger market cap cryptocurrencies? Only time will tell - until then, we’ll keep you up to date at W3FTC!

See you next week!