He current transformations brought about by blockchain technology and digital currencies have caused a disruption in many areas of the economy However, it remains exciting under which exact conditions digital money will establish itself and what forms the competition will take.
This is where Central Bank Digital Currencies (CBDC) come into play. However, not all CBDCs will be based in only DLT systems like blockchain, several remain based in conventional central bank infrastructure. Hence, CBDCs are to be clearly distinguished from non-state currencies such as Bitcoin, Etherium or Ripple, which are created by blockchain technology.
China is, according to experts, 2-3 years ahead of other nations in developing and testing a CBDC. For example, China has already been field-testing the e-Yuan in four major cities since April 2020. Next year, China could start a broad rollout. One thing should be clear: the e-Yuan will not be a cryptocurrency. On the contrary, transactions in e-Yuan will be like an open book for Chinese regulators. The US is also currently working on a CBDC, but also on a private sector solution (Diem, formerly Libra). The EU is working on an e-Euro, too. Among all, e-Krona of Sveriges Riksbank is designed the most similarly to decentralized currencies with less conventional factors.
A digital currency gives a government unimagined possibilities to control all payment flows. At the same time, however, international coordination mechanisms will have to be put in place to enable currency areas to exchange with each other. Of course, this raises the question of what information one wants to exchange among each other. The legal framework is likely to be different in the individual countries.
Arguments such as money laundering and crime prevention could be used to restrict individual anonymity. Moreover, a government could use the new digital central bank money in a repressive way:
– CBDC could be given an expiry date to force consumers to quickly put the money into circulation.
– Special taxes could be deducted from the citizen’s account at the touch of a button.
– Negative interest rates can be enforced as citizens no longer have the option of hoarding cash. There could be a regional restriction on the use of money, which would be an excellent way to restrict the choice of residence and travel.
– Tying it to civic good behavior would also be a truly dystopian option.
In any case, issues of personal data confidentiality, cyber security and fraud prevention must also be considered. The needs and legal requirements of other countries must also be taken into account. One example is the strict FATCA rules in the US, which place special requirements on the identification of customers and hold out the prospect of sanctions in the event of non-compliance.
Another question is the role of commercial banks when all citizens have a central account with the central bank. The challenge will be to define the new role of commercial banks to fit their new functions.
The Friedrich Naumann Foundation Vietnam has also recognized the relevance of the issue and made CBDC a priority topic in Vietnam. Together with the University of Economics HCMC, two field studies are currently investigating the perspectives and implications of digital currencies as well as the potential of a blockchain-based smart contract architecture for Vietnam. It is important for the country to prepare and be prudent with the introduction and use of digital money. Vietnam must find its way in dealing with blockchain technology and digital currencies if it does not want to be overrun by developments. [C]
