There are some trends in the crypto-world that start as a snowball and grow into an avalanche. Sovereign digital currencies, or Central Bank Digital Currencies (CBDC), as they’re more commonly known, is just the latest trend to join the growing list. Now, at least 18 central banks have publicly acknowledged the development and launch of their own forms of sovereign digital currencies.
As more investors and businesses turn to the tokenization of digital assets, there’s no stopping the inevitable rise of digital currencies worldwide. Many banks developing CBDCs see it as a solution to rising demand for more centralized and regulated forms of digital currencies like Bitcoin. In the banking sector, we’re witnessing a shift from paper-based transactions to more secure, efficient, transparent and lower-cost digital transactions.
Among the list of countries slated to release their own form of CBDCs are Thailand, Singapore, and Iran. China announced in August 2019 that its CBDC was ‘progressing well,’ and would soon be ready for launch. Even the Reserve Bank of India (RBI) is looking to make India a ‘cashless’ economy by 2020 – an ambitious goal.
Only a handful of small economies have decided to establish national digital currencies. Ecuador, sometimes described as one of the first countries to establish a digital currency, says that in reality what it has built is a new payment system – not a digital currency
While decentralization is a central tenant in the development of cryptocurrencies like Bitcoin, large crypto clearing houses dominate the market to date. Building infrastructures for managing and exchanging digital currencies at scale means banks can begin to shift their focus to more pressing issues such as security and liquidity.
The many security risks associated with the management of CBDCs are well known and were solidified in a statement made by the Federal Reserve Board President addressed to Congress in November 2019.
In it, he describes both the hopes and risks of developing a CBDC in the U.S., stating, “If it is designed to be financially transparent and provide guarantees against illicit activity… it may require the Federal Reserve to keep track of all payment data using digital currency. At times, this raises issues regarding data privacy and information security.”