In a groundbreaking development, the UAE marked the commencement of its inaugural cross-border payment through the use of the ‘Digital Dirham’ on Monday. This significant achievement aligns with a broader global initiative to embrace digital representations of national currencies issued by central banks worldwide. Below, we explore the implications for financial landscapes and the global economy.
“The surge in demand for cryptocurrencies has heightened interest in digital investments, leading to discussions about a new form of digital currency known as Central Bank Digital Currency (CBDC),” elucidated Brian Deshell, a cryptocurrency trader and analyst based in the UAE.
CBDCs vs. Cryptocurrencies
“While CBDCs share conceptual origins with cryptocurrencies, they differ significantly. The key distinction lies in centralization,” explained Brody Dunn, an investment manager at a UAE-based asset advisory firm.
“Cryptocurrencies operate on a decentralized model, devoid of central control. In contrast, CBDCs are centralized digital currencies, with the central bank of the issuing country exercising control over their value.”
By definition, CBDCs bear similarities to Stablecoins, which peg their value to fiat money but are privately issued, whereas CBDCs are issued by governments.
Global Adoption of CBDCs
Research indicates that 110 countries globally are either researching or developing CBDCs, with varying stages of progress. As of June 2023, 11 countries have already adopted CBDCs, 53 are in advanced planning stages, and 46 are actively researching the topic, according to Statista, an e-research platform.
In 2020, seven central banks, including those of the US, Europe, Japan, Switzerland, Canada, Sweden, and England, expressed their intention to assess the feasibility of publicly available CBDCs. The latest addition to countries issuing CBDCs is Jamaica.
Several nations, including China, Russia, South Africa, Uruguay, Barbados, Switzerland, Thailand, and Iran, are in the process of implementing CBDCs. The UAE joined this trend in 2022 by expressing interest in issuing a CBDC.
Understanding CBDCs becomes crucial for cryptocurrency investors as they have the potential to impact the crypto market.
Functionality of CBDCs
A Central Bank Digital Currency (CBDC) is essentially an electronic form of cash that can be exchanged similarly to traditional currency. Unlike most digital payments that involve multiple intermediaries, CBDCs operate more directly, resembling the exchange of physical cash.
“While most digital payments act as instructions for a bank to transfer ‘real’ money, CBDCs cut out intermediaries, resembling the direct transfer of cash between parties,” added Dunn.
Infrastructure for CBDCs
Brian Deshell further clarified that both cryptocurrencies and CBDCs rely on networked electronic resources for transaction creation, tracking, and validation. In the case of CBDCs, a central database controlled by the central bank issues the currency and assigns a unique serial number to each e-currency. Typically, central banks peg the electronic currency to their national currency, referred to as digital fiat currencies.
The Future Potential of CBDCs
According to analysts at PricewaterhouseCoopers (PwC), the future of money is likely to involve a combination of centralized, decentralized, account-based, and token-based systems. CBDCs, stablecoins, and cryptocurrencies may coexist with traditional digital and physical currencies. Deshell also sees potential in CBDCs, envisioning them as a transformative force in the financial world, offering efficiency, security, and transparency.
Publish January 30, 2024
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