While many seem convinced cryptos are the currency of the future, financial experts believe it’s the underlying blockchain technology that’ll help digitize paper currency. On February 1, 2022, India’s finance minister proposed introducing a Central Bank Digital Currency (CBDC), joining a growing list of world economies exploring the use of the digital currency. In fact, researchers from MIT are working with the Federal Reserve Bank of Boston to design and test the feasibility of CBDCs in the US, which experts believe is the way to go. “Yes, I think CBDCs will absolutely be the currency of the future,” Alan Vey, CEO and co-founder of Aventus Network, assured Lifewire over email. “In the same way that banks switched from holding gold or physical notes in bank vaults to using online databases, CBDC represents the logical next step in representing currency.”
Digital Money
CBDCs are issued by a central bank directly to people without going through traditional bank accounts. Individuals would have CBDC accounts directly on the central bank core ledger and can access their money and transact through a digital wallet application. Governments are exploring CBDCs to help overcome many disadvantages of the existing monetary system. For one, financial experts believe CBDCs can help establish a more inclusive digital payments ecosystem that is more accessible. Saurabh Sharma, founder and CEO of The Blockchain School, told Lifewire over email that being powered by blockchain, CBDCs would help governments program the money. “For example, the CBDCs can take the shape of ‘fit-for-purpose’ money, which can be used for social benefits and other targeted payments in the country. They could now ensure there’s no slippage and the end consumer gets all the benefits,” illustrated Sharma. Others believe the biggest advantage of CBDCs is it can help foster interoperability across payment systems. Vey specifically pointed to the SWIFT infrastructure, which powers international financial transfers, and has remained virtually unchanged since the 1970s. CBDCs, experts believe, could help remove the inefficiencies with SWIFT.
Blockchain Done Right
All financial experts Lifewire spoke to agreed that CBDCs are a validation of blockchain technology and not cryptocurrency. Vey explained that CBDC takes the principles of blockchain and applies them with a slightly new approach. According to him, if we were to classify CBDCs with a Venn diagram, they would be at the intersection of blockchain, cryptocurrencies, and governance systems and applied to the most valuable assets of all: currency. “For instance, while most cryptocurrencies are totally decentralized (so the value is set entirely by scarcity and how many people are willing to buy or sell), CBDCs will probably have broad elements of centralization, so that central banks can still influence inflation rates or perform quantitative easing,” reasoned Vey.
Money Hacking
Blockchain was once thought of as unhackable, but that isn’t true anymore. Ronghui Gu, the co-founder of blockchain security ranking platform CertiK, told Lifewire over email that public blockchains, by design, are susceptible to 51% attacks, which can be thought of as a hostile takeover of a corporation, where one entity gains control of a majority of the voting power. He said that although CBDCs could suffer from the same attack, the governments and state treasuries would make sure attacking CBDCs isn’t feasible. “CBDCs are likely to be designed so as to successfully avoid such attacks. One easy way to do so is to limit who is allowed to mine on the network. A U.S. CBDC could restrict this ability to nodes operated by the twelve branches of the Federal Reserve, for example,” explained Gu. Vey thinks the positives of the technology outweigh the risks. “Because of the way that blockchain is built—on a unified, indisputable, tamper-proof ledger—it has the potential to significantly outperform the current frameworks for international finance. It’s just a matter of time before the technology reaches a point where it’s ready.” But there’s more to CBDC than just the technology itself, Karthik Ramamoorthy, Project Manager Automation at S&P Global Market Intelligence, told Lifewire over Skype, adding CBDC is a complex topic and requires deep analysis and debate since it involves questions related to monetary policy, central banking operations, payment systems, and regulations. Vey, however, thinks it’s just a matter of time. “Central Banks around the world have already recognized the potential benefits of CBDC, from infrastructural stability and security through to efficiency and cost. It’s more a question of when, not if.”
