In a recent 27 page report, Kraken answered the ‘why?’ behind Central Bank Digital Currencies (CBDCs), highlighting their various benefits and dangers. Kraken is one of the worlds most popular platforms serving the digital assets sector. It has managed to do so through not only its long-standing presence, but through the implementation of forward-thinking technologies such as the Lightning Network, and through designations granting it the status of a chartered bank. As such, it has a firm grasp on the momentum behind CBDCs and what these assets may look like moving forward.
Central Bank Digital Currencies (CBDCs)
Before diving in to the development surrounding CBDCs, what exactly are they? They are digital assets typically built utilizing blockchain technologies, issued by Central Banks – simply put, they are digital variants of currently existing FIAT currencies.
Kraken notes that there are actually two subsets to CBDCs, both of which are being considered by various governments. There are the ‘retail’ variants (as previously described), and ‘wholesale’ variants which are expected to be restricted to select groups dealing with Central Banks requiring efficient large-scale transfers of value.
In the near future, these assets have the potential to change the way governments and banks interact with not only each other, but the general public on a global scale. Kraken states, ‘Although the utility of CBDCs and their impact on societies and governance has yet to be seen, we believe the global rise of CBDCs has begun.’
For a more detailed look at what CBDCs are, and how they function, make sure to peruse our educational overview HERE.
The country most commonly associated with a CBDC is typically China, due to the trialing of its ‘Digital Yen’. There are however various examples of countries/regions actively considering, or already developing their own variants of a CBDC. Kraken notes that this was highlighted in a recent survey completed by the Bank of International Settlements (BIS), in which 56 out of 65 (85%) of Central Banks relayed their interest. The following are a few of the global regions which Kraken has identified as potential major players in CBDCs in the near future.
- United Kingdom
- United States
- Latin America
The Appeal of CBDCs
The aforementioned list of regions considering CBDCs spans the entire globe. With such huge interest being shown in these assets, one has to wonder why. While the benefits of a CBDC are extensive, Kraken notes the following capabilities as being particularly attractive to governments.
“If successfully created, issued, and widely utilized, CBDCs could provide governments the ability to track or trace transactions effectively and provide real-time updates of economic activity within a given jurisdiction; payment systems could also operate seamlessly and efficiently while offering near-instant settlements at lower costs. Both of which are too appealing for central banks to ignore.”
The efficiency associated with CBDCs does not just pertain to their usage between financial institutions – it extends to the public as well. In an on-going example, Kraken highlights the extended time-lines surrounding the dissemination of stimulus checks within the United States. While there are various causes for this issue, Kraken notes that, “With the usage of CBDCs, we can imagine a far more efficient and responsive process where economic activity is stabilized by direct transfer of money from central banks to qualifying individuals.”
So CBDCs can help increase efficiency between financial institutions themselves, along with the public itself. Building on this further, is the ability to upend the remittance industry/cross-border payments – an industry built upon intermediaries and a resulting high-level of cost. Kraken states that, “Traditional methods of cross-border transactions invite a flurry of intermediaries that hold accounts on behalf of customers or banks, known as a payment corridor…If CBDCs are made interoperable on a global scale, in a manner where one digital currency can be settled or interchangeable with other sovereign digital currencies, remittance payments would also see a dramatic shift and disintermediation.”
A Darker Side
While the benefits of CBDCs are broad and far-reaching, these proposed assets are not without their downfalls. At the end of the day, their security, usefulness, and value are only as good as the Central Bank which issued them.
This means that they will be subject to monitoring and devaluing, much like their physical counterparts – being digital does not make them immune to the actions of their issuing body. It is this major point which leads Kraken to believe in a future where Cryptocurrencies will continue to thrive.
“Cryptocurrencies are often a safe haven for those in hyperinflated economies and unstable political regimes that sometimes impose strict capital controls due to the instability. In this environment, CBDCs will be nothing more than another unstable store of value that is likely ineffective in providing stability against a devaluing fiat. We believe that for those looking to skirt oppressive governments or regulations and rely on crypto as a source of value and means for transferring money will eventually flock to cryptocurrencies for privacy and financial security.”
For those worried that CBDCs will replace cryptocurrencies, this is believed to be unlikely. There is enough difference in the structuring of each, that both will find a home in the future global economy. Kraken echoes this, stating, “It’s evident that CBDCs and cryptocurrencies serve very different purposes, which is why we believe the two will likely continue to coexist.”
In fact, not only does Kraken believe that both CBDCs and cryptocurrencies can co-exist, it believes that CBDCs will expedite the others adoption by creating awareness of the benefits behind digital currencies not affiliated with any one government.
“Ultimately, we believe CBDCs could effectively be an accelerator of crypto as more people open their eyes to the realities of fiat and digital fiat.”