Wed 23 Jun 2021

Nations that plan for a world of cryptocurrency will come out on top

Technology is being developed at rapid speed, and while some might not last outside a ‘locked down’ world, others have found a permanent place in our daily lives. Cryptocurrency, it seems, is one that is here to stay. 

Cryptocurrency will soon make its way into our daily lives – it’s no longer something just for ‘geeks’, ‘nerds’ and those seeking to operate in the dark, away from prying legal and regulatory eyes. The virtual currency has been thrust into the spotlight of late. Its increase in value during 2020 has helped it become universally recognised.

Central Bank Digital Currencies (CBDCs) are a new type of currency that governments around the world are experimenting with in the hope and expectation that their development will lead to increased payment efficiency and lower costs than the established Fiat currencies (government-issued currencies that are not backed by a commodity such as gold). For those of you wondering whether CBDCs will replace cash, the short answer is no. There will always be cash available for those who want to use it.

But, as the development and adoption of this asset form gains speed, we must ensure its security.  A balance must be struck between a central quasi-governmental body, collecting enough information about CBDC users to prevent issues such as fraud and double spend, and the secure handling of this data to ensure that it’s used for the right purposes and doesn't fall into the wrong hands. 

But how will all this work in practice? For the end user, generally speaking, the mechanics of how they get paid and how they are able to access their funds is of relatively little importance.  Nonetheless, the issuers of CBDCs will need to make policy decisions on how they deploy ‘Distributed Ledger Technology’ - a protocol that enables the secure functioning of a decentralized digital database - to deliver the anticipated payment efficiencies and lower costs, as well as to balance a permissioned v permission-less blockchain. There will also be wider security issues to consider, with regards to whether it is more appropriate for CBDCs to be account based or token based.

But is there a genuine appetite for consumers to have access to CBDCs? We have all been conducting our day-to-day affairs differently during Covid-19 lockdowns.  Instead of carrying notes and coins in our wallets, we pay for our weekly shop either with cards or our mobile phones - a cheque book is fast becoming an endangered species.  This rapid shift to an almost cash-free society has only accelerated appetite for, and acceptance of, change. Personally, I think it is only a matter of time before the vast majority of payments are carried out using CBDCs, and those governments which accept this proposition and plan accordingly are those that will reap the benefits.  Where innovation leads the state must surely follow.

First published in The Herald 

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