Breaking the Financial Status Quo with Central Bank Digital Currencies

By Antony Welfare, Chief Commercial Officer at NEM Group

Blockchain technology is now over a decade old. As the technology approaches the 12th anniversary of the publication of Satoshi Nakamoto’s Bitcoin white paper, it is clear that the technology has entered a new mature phase of significant development.

Many emerging technologies follow a similar path of development to adoption. For blockchain, this trend is evident in the significant levels of enterprise and institutional blockchain adoption we are starting to see globally.

The adoption of Blockchain or distributed ledger technology (DLT) use-cases by enterprises, financial institutions, and global corporations has reached a peak in 2020 which we have not seen before. For example; PayPal recently announced that it will bring crypto trading to its 325M+ usersVisa has filed a patent for its own blockchain based digital dollar and Walmart has incorporated blockchain into its supply chain systems.

While these use-cases all represent valuable means of making many enterprise operations fit for purpose in the 21st century, the ultimate use-case of blockchain may be one that is still in development. Central Bank Digital Currencies (CBDCs) may indeed be the blockchain application to profoundly shape the way our society operates.

To those uninitiated with blockchain, the launch of a CBDC might seem straightforward, after all a CBDC is simply a digital representation of sovereign currency. However, the creation of a digital dollar, a digital pound, or a digital euro is far more complex than simply spinning up a conventional cryptocurrency or digital token--due in large part to the inherent complexity of our financial systems.

The potential benefits for CBDCs to reform our financial system are significant: from stability, to reduced fraud, to faster audit and to greater accessibility. Financial inclusion is often touted as a fundamental goal by private payments platforms, but CBDCs could hold even greater power in empowering individuals to access fiat currency, especially in countries where banking penetration is low. Similarly, CBDCs could provide central banks new tools in terms of monetary policy to address economic crises--an application particularly relevant in our current era of economic uncertainty.

Many governments around the world are now exploring plans for implementing CBDCs. The People’s Bank of China, the Chinese Central Bank, has devoted considerable resources to exploring a Digital Yuan since 2014, and is now in advanced stages of testing and implementing its digital currency. The U.S., prompted in part by significant problems in issuing federal payments during the COVID-19 pandemic, has accelerated its plans for a digital dollar.

In Europe, approaches have tended to differ significantly across jurisdictions. The G7 countries, that is the UK, France, Germany and Italy have opted for a cautious, research heavy approach, with debate as to whether central banks should choose a retail or wholesale CBDC approach first.

The Bank of International Settlements (BIS), the international financial institution formed by 62 central banks across the globe, has outlined recommendations for a two-tier system for CBDC, with a central bank operated infrastructure. In this framework, CBDCs would operate as a complementary means of payment, to address specific use cases, as well as acting as a catalyst for innovation.

The issue with this well intentioned, slow moving approach, is that it fails to grasp the significance of what a CBDC will accomplish. It is impossible to move to a digital currency without disrupting our current financial system. If we simply try to build on analogue infrastructure, to make it fit the digital era, digital currencies won’t be successful.

We need to imagine fundamentally, how we want CBDCs to work in an entirely revamped financial system, and work backwards from that vision to put the necessary infrastructure in place.

Already, there are innovative jurisdictions who are taking the initiative to develop such a bold vision.The Lithuanian Central Bank, the Bank of Lithuania, is one such example where the monetary authorities are moving quickly to disrupt old systems. The bank recently issued the world’s first digital collector coin, LBCOIN, designed to test citizens’ interactions with digital tokens. Built Symbol by NEM, the latest enterprise grade blockchain technology, the LBCOIN platform allows users to trade digital tokens to earn a physical Silver LBCOIN which has its own monetary value.

This practical approach to developing a CBDC will likely yield dividends for Lithuania as by measuring how citizens interact with blockchain technology, trading coins and tokens, they will gain important data on retail CBDC behaviors.

It is important to note that this approach does not neglect the research and regulatory aspects of building a CBDC, but rather complements them to build a real understanding of how CBDCs would work in our everyday society, rather than just on a banker’s terminal screen--an approach that economists and social scientists would designate as giving the experiment real world “external validity.”

No matter what approach monetary authorities take to building a CBDC, it is not a simple task, and it is likely that we will not witness a full CBDC launch for several years.

Make no mistake though, that change is on the way, and it will shape our financial system for a generation to come.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.