CBDCs AND WHY BANKS WILL HAVE TO CATCH UP
Earlier this week on Saturday October 2nd the Federal High Court of Nigeria led by Justice Taiwo Aboyami Taiwo okayed the rollout a Central Bank Digital Currency (CBDC) as a legal tender. The digital currency was named eNaira issued by the central bank and supported by the eNaira wallet. Consequently Nigeria’s CBDC website also went live. On this website, the Central Bank of Nigeria (CBN) described the eNaira as “both a medium of exchange exchange and a store of value, offering better payment prospects in retail transactions when compared to cash payments”. This was as a result of their breakthrough in the project GIANT which which was in progress for five years.
Over 81 countries are exploiting the possibilities of rolling out CBDCs. Of these, only 5 countries have fully rolled out the CBDCs to it’s citizens; the Bahamas, Antigua and Barbuda, Saint Lucia and two Eastern Caribbean nations. Alongside Nigeria, over 14 other countries are running pilot projects of CBDCs including China, South Korea, and Sweden.
So what is a CBDC and how does it work?
According to the Blockchain Council, “CBDC is an electronic form of central bank money that can be used to store of valueand make digital payments seamlessly”. Technically Central Bank Digital Currency also known as the digital fiat currency is a digital currency issued or proposed by a central bank to be used as an official legal tender of the country or region.
With the adoption of cryptocurrencies going mainstream, the traditional financial system has greatly been disrupted. Thus Central banks around the world have been forced to evolve and embrace the blockchain technology to avoid any eventualities posed by cryptocurrencies. Therefore the idea of the CBDC came from the blockchain technology though a CBDC may or may not be a blockchain.
Ideally a CBDC would likely be implemented using a database run by the central bank, a government or approved by private entities. This database would act as an immutable ledger that records all the transactions and the amount of money held by each individual or corporation.
Types of CBDCs
1. Wholesale CBDC: a type of CBDC that can be traded and exchanged between central banks, commercial banks and retail banks. This kind of CBDC would facilitate payments between monetary institutions and enable faster cross border transactions. It’s the most sound CBDC project that most countries are looking into.
2. Retail CBDC: this type is designed for ordinary consumers and common citizens who will use it to conduct daily business transactions. This type is based on a fully distributed ledger technology just like the blockchain unlike the wholesale one which is centralized.
Why Central Banks will have to embrace CBDCs.
1. To increase financial inclusion: due the high cost of establishing the physical infrastructure and the network infrastructure of banks in all conners of a country. A significant fraction of most country’s populations remain unbanked especially in developing countries. CBDCs would provide a direct connection between consumers and central banks as a result ruling out the need for expensive the infrastructure.
2. To curb illicit transactions and corruption: since CBDCs borrow their infrastructure from the blockchain, their immutability provides a way to track all the transactions throughout their jurisdictions. This would enable a transparent vie of the money trail for each and every coin thus eliminating illegal transactions, corruption and embezzlement of public funds.
3. To Facilitate a fast and seamless way of making payments: the traditional banking system is relatively slow as it involves intermediaries like commercial banks and retail banks which process and distribute money from the central bank to the economy. CBDCs would automate the process cutting down the time taken for a transaction to go through.
4. Enhance cross-border transactions: CBDCs have the potential to simplify and enhance money transfer across different jurisdictions. This would especially boost the remittance by citizens working abroad.
I hope you found this article informative. For any comments or clarifications, feel free to pose it in the comments section.