The Bank of England has recently made an announcement to go into formal consultation with the Treasury about the possible establishment of a Central Bank Digital Currency (CBDC)- you might call it a form of cryptocurrency, a new Bitcoin if you will. However, this would be incorrect.
A crucial component of cryptocurrency, such as Bitcoin and Ethereum, is its decentralised nature. The blockchain technology which they use results in an independent currency, the creation and distribution of which is not controlled due to the lack of a ‘central body’ or server, binding them. It is this that offers individuals who use ‘crypto’ a supposed anonymity in transactions, a concealed way of earning and spending in an age where almost anything can be traceable- such as would be the way of the CBDC, which would provide transparency as opposed to secrecy.
Thus, though the introduction of a CBDC may at first play into Bitcoin fanatics’ claims of the future of banking being a digital one, the CBDC is not what they envision. However, it may be better.
Traditional cryptocurrencies are infamous for their volatility; in a single day in May 2021, the price of Bitcoin plunged by about 30% before recovering to roughly 12%. Ergo, a world reliant wholly upon such currency would be a world built on a crumbling foundation, or perhaps, on an active volcano.
This makes viz. Bitcoin, unsuitable as a traditional fiat currency as it fails to retain value, stopping short of meeting the function of money. Instead, cryptocurrency has become an asset that individuals hold to make a return on investment.
In contrast, the CBDC should be more reliable, it is speculated that it will use similar technology to cryptocurrencies, such as the blockchain, allowing for faster and more efficient payment methods, though it’s centralisation will ground it, as its supply will be able to be influenced by ‘Open Market Operations’ (Monetary Policy), fending off dramatic fluctuations.
Hence, the CBDC would exemplify a normal digital pound- just digital. This era of digitalisation may already be seen in some effect as due to COVID-19 online payments have become increasingly popular, 76% of UK citizens using online banking in 2020.
The consultation in 2022 will form part of a ‘research and exploration’ phase that will aid the Bank and Government in the development of future plans, plans which are already reality in some countries; China, for example, being a front-runner in this global race, currently in the process of testing a digital yuan in major cities including Beijing, Shanghai, and Shenzhen.
Written by Maya Hood