In the rapidly evolving digital age, the global financial landscape is undergoing major changes. At the heart of the debate about the future of digital currencies, two concepts dominate the discussion: central bank digital currencies (CBDCs) and cryptocurrencies. While both offer a clear vision for the future of global finance, there are strong indications that CBDC is more likely to be adopted as a global standard.
A study by the Atlantic Council, a US-based think tank, found that 130 countries, representing 98% of the global economy, are currently considering digital versions of their currencies. Almost half of these are in advanced stages of development, testing, or launch. All her G20 countries except Argentina are at such an advanced stage. Eleven countries have launched his CBDC, including parts of the Caribbean and Nigeria. Meanwhile, China tested a CBDC in 200 different scenarios with 260 million people. However, despite the global push for CBDC, implementation has been disappointing in countries such as Nigeria, and Senegal and Ecuador have halted development. Here are some fundamental reasons why CBDCs hold more promise than cryptocurrencies in setting global financial standards.
1. Authority and Regulation
One of the main benefits of a CBDC is central bank oversight and regulation. With a central authority controlling its distribution and use, CBDCs provide users and other stakeholders with a high level of trust and security. CBDCs that are supervised by a central bank are considered more secure because the centralized authority ensures consistent application of policies and regulations. Tracking and monitoring transactions to prevent illegal activities, stability of value, advanced security infrastructure, legal protection, and central bank control of the currency strengthen user trust and security. Furthermore, with the support of central banks, CBDCs have backup and recovery mechanisms that ensure the integrity and availability of digital currencies.
2. Stability and sustainability
Cryptocurrencies often face high price volatility, preventing them from being accepted as a stable medium of exchange. In contrast, central bank-backed CBDCs are expected to provide more consistent value stability. Fluctuations in the price of cryptocurrencies are often caused by speculation, illiquidity, news and regulatory responses, and market immaturity. The nascent crypto market, dominated by individual investors, tends to be driven by emotions such as fear and greed rather than fundamental analysis. On the other hand, CBDCs, which are regulated by central banks, are designed with stability in mind and are expected to provide more consistent value stability than decentralized cryptocurrencies.
3. Financial system integration
CBDCs issued and supervised by central banks facilitate integration into existing financial infrastructure. With full support from central banks and existing legal and regulatory frameworks, CBDCs can be seamlessly integrated into traditional banking and financial systems, facilitating cross-border transactions and exchange with traditional currencies. . For example, financial messaging service provider Swift is focused on CBDC interoperability. They have started beta testing with several central banks and over 30 financial institutions to ensure that the new digital currency operates smoothly alongside current fiat currencies. This objective aims to address potential global fragmentation in CBDC development.
In contrast, the decentralized nature of cryptocurrencies can pose challenges to integration with existing financial infrastructure, such as the absence of a central authority, regulatory challenges, and acceptance by financial institutions.
4. Global acceptance
As official currencies issued by central banks, CBDCs have the potential to gain wide acceptance among nations and become an integral part of the global financial order. CBDCs are official currencies issued by central banks and enjoy the trust and confidence of national monetary authorities, facilitating their acceptance among citizens. For example, China’s digital yuan, backed by the People’s Bank of China, has been widely accepted domestically. Additionally, CBDCs are designed to integrate with existing payment systems, as seen in the Sand Dollar project in the Bahamas, which allows transactions via smartphones. At the international level, CBDCs can facilitate cross-border financial cooperation, and countries such as ASEAN member states are considering CBDC interoperability to facilitate trade and investment.
5. Transparency and accountability
The ability to track CBDC transactions provides governments with an effective tool to enhance financial oversight and tax compliance. The transparency provided by CBDCs makes it easier to identify transactions that may go unreported and detect suspicious transaction patterns related to money laundering and terrorist financing. Additionally, real-time monitoring allows governments to quickly detect and respond to illegal activities such as fraud, ensuring the integrity and security of the financial system is not compromised.
6. Promoting financial inclusion
CBDCs can play a vital role in promoting financial inclusion, providing access to financial services to people who have traditionally been excluded from the traditional banking system. CBDCs have immense potential to promote financial inclusion, especially for those marginalized by the traditional banking system. CBDCs make financial services more accessible, especially in rural and remote areas, as they are easily accessible via mobile devices and have lower transaction costs.
Additionally, account opening and cross-border transactions will be made easier and more cost-effective, supporting migrant workers and other populations for whom traditional banking services have traditionally been difficult to access. For example, the Sand Dollar project in the Bahamas demonstrated how CBDCs can expand access to financial services island-wide, allowing residents of remote islands to transact using only their mobile phones. Initiatives like this demonstrate how CBDCs can be an important tool in promoting financial inclusion globally.
7. Control of monetary policy
CBDCs give central banks additional tools to implement monetary policy, allowing for more timely and effective intervention in the face of economic crises. CBDCs give central banks enhanced capabilities to implement monetary policy. Improved liquidity management and the ability to apply negative interest rates will allow central banks to respond more quickly and accurately to changes in economic conditions.
In addition, CBDCs enable faster monetary policy transmission, such as the delivery of stimulus directly to public accounts, and provide access to real-time transaction data. This capability is critical because it allows us to respond quickly to potential crises and maintain economic and price stability. Moreover, prompt and accurate actions by central banks in crisis situations can increase public confidence in financial institutions and governments. CBDCs will therefore become an important tool in central banks’ monetary policy toolkits, strengthening their role in safeguarding the country’s economic health.
Although cryptocurrencies have benefits such as decentralization and privacy, the lack of consistent regulation and high volatility make them not ideal as a global financial standard. Meanwhile, CBDCs, backed and regulated by central banks, promise a new era in a more stable, transparent and inclusive global financial environment.
In the context of modern diplomacy, embracing CBDC as a global standard can foster cross-border economic cooperation, strengthen bilateral and multilateral relationships, and advance the sustainable development agenda. As a step towards a more integrated and harmonious future, CBDCs could be the key to transforming the global financial order.
