There have been many news stories covering central bank digital currencies in the recent past. Various central banks have put out statements saying that they are looking into launching a CBDC. Even the head of the European Central Bank acknowledged that there was a real demand for these digital currencies. This has led to a perception in the crypto community that numerous banks could launch a central bank digital currency in the next year or two.
Perception Not Based on Facts
While many central banks have admitted they are investigation digital currencies, it is unlikely that many of them will ever launch one. For instance, a recent survey by the Bank of International Settlements indicates that about 85% of banks do not see themselves launching a digital currency in the near future. In the survey, only one central bank saw itself as likely to launch a wholesale CBDC in the next few years.
However, the survey also found that about 70% of central banks that took part in the survey were working on a CBDC. It would appear that most of that work is pure research and they do not plan to roll out a CBDC. The survey also found that only five of those that took part in the study were in advanced stages of development such as launching a pilot project.
The flurry of activity to create a CBDC by central banks appears to have been triggered by the announcement of the Facebook Libra project. Central Banks appear to have taken note and they are trying to stay ahead of the curve. Otherwise, technology might leave them out of the global economy. For the first time in the modern era, central banks have a competitor to their business model. Despite the increased activity, actual results have not yet been seen.
What are the Risks and Rewards of Central Bank Digital Currencies?
Central bank digital currencies offer many advantages over existing fiat money. For instance, it will be easier to collect taxes. Tracking sources of money will also be easier as will be the implementation of monetary policies. Additionally, the cost of producing currency will also be lower. Finally, making cross border payments will be cheaper and faster. The main risk of CBDCs is that they could trigger bank runs.
How soon will CBDCs Become the Norm?
Thus far, things are moving very slowly on the ground. Those that have launched so far have been a major failure. A good example is the Venezuelan Petro, which has failed to take off. Only pilot projects and theoretical research projects have been announced thus far. There have also been announcements by various central banks that they could soon launch a digital currency but no clear dates have been set out.
The most notable project thus far is China’s digital currency. About five digital currencies could be launched by central banks in the next two years. Despite a lot of hype around digital currencies, none have been launched thus far. Taking all factors into consideration, it is unlikely that they will pose any threat to cryptocurrencies in the near future.
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