The idea of a digital currency emerged as early as 1983 but no one could successfully cross the technological barriers. In 2008-2009, these technical gaps were filled by the pseudonymous Satoshi Nakamoto who successfully developed a decentralized digital cash system. Pseudonymous Satoshi Nakamoto surprised the world by developing the first untraceable cryptocurrency, namely, Bitcoin.
One of the salient features of cryptocurrency is decentralization, in essence, the central banks are not kept in the loop of the transactions. It is a strict peer-to-peer system wherein the data of your transactions remains out of the control / interference of the government; that automatically deems the transaction illegal.
At its advent, there were apprehensions concerning the operations of Cryptocurrency. The development of cryptocurrency infused people with either ideas and hope or fears and anxiety. The countries reacted similarly to such an innovation; some facilitated the use and trade like Taiwan, others banned it completely like Egypt.
Eventually, the introduction of Libra by Facebook, a digital currency, pushed the countries to understand and consider Central Bank Digital Currency (“CBDC”) in order to centralize the probable future of the medium of exchange.
“Central banks see Big Tech issuing stablecoins, like Libra, they see this niche of digital money and now it’s the matter of who will have a money issuance prerogative, governments or the private tech companies?” Hartinger told CoinDesk.
With the development of efficient online banking and platforms like PayTM, GooglePay, et cetera, the economies of developing countries are going cashless at a steady pace. The developed countries are way ahead though, with Sweden having just 1% of its GDP in cash in the year 2018 compared to 11% in the Eurozone, 8% in the United States and 4% in Britain. Given an almost cashless economy, Swedish Central Bank has announced the pilot project for its CBDC called e-krona after the bank said it is pondering over it in 2016. The test period shall last until February 2021.
“The Bank of England has described a CBDC as electronic Central Bank money that:
(i) Can be accessed more broadly than reserves, (ii) Potentially has much greater functionality for retail transactions than cash, (iii) Has a separate operational structure to other forms of Central Bank money, allowing it to potentially serve a different core purpose, and (iv) Can be interest bearing, under realistic assumptions paying a rate that would be different to the rate on reserves”
Ahead of the announcement made by the Swedish Central Bank, Sarah John, the Chief Cashier of Bank of England claimed it is “crucial” for Bank of England and other Central Banks to consider digital currency system as a new payment system and, if so, “quicken the pace” on determining how to regulate the new asset class. Various Central Banks are trying and developing models of CBDC, however, Swedish Central Bank is a first to commence the testing. The other economies moving towards cryptocurrency involve Japan, China, Switzerland and India.
“The world over, central banks and the governments are against private digital currency because currency issuance is a sovereign function and it has to be done by the sovereign,” – Shaktikanta Das
India is one of the countries that is looking forward towards having its own CBDC as reported in April 2018. In September 2018, the Reserve Bank of India started analyzing the advantages and disadvantages of a cryptocurrency as revealed by RTIs filed by Business Line. Admittedly, there is scepticism towards developing a digital currency in India owed to a lack of a globally acceptable system and the lack of awareness of crypto-economy, among other issues that are common to all the nations that are moving towards a crypto-economy. India is in discussion with other nations and Central Banks, and has taken a back seat, for now.
The concerning aspects of CBDCs will be elaborated upon in another article.