It was the International Monetary Fund that brought the debate about CBDCs to the table. IMF deputy director Bo Li explained that more than 30 countries are already diving into the creation of these digital currencies, which he describes as “unprecedented global interest”. What do these CBDCs offer? And perhaps more relevant, why do all governments seem so concerned?

What are CBDCs? It is the initials of ‘Central Bank Digital Currency’. As defined by the Bank of Spain: “a new form of money issued electronically by a central bank”. Unlike decentralized cryptocurrencies, in this case we have a digital currency where every transaction is monitored by a central bank.

The best-known example is the e-Yuan, a true pioneer in this field. Different central banks have been working on their creation for years, although we also have the digital euro or digital yen of the future, although they have not yet materialized.

What can be done with them? It is worth noting how each CBDC was developed, but their advantage lies in the fact that they are digital currencies. For example, they can be programmable if they are based on the blockchain. That is, it can be used to automate and schedule certain processes.

Today, payments are made quite directly. Buy certain products, pay taxes or make certain transfers. A world of possibilities opens up with digital currencies; From receiving payroll on different days according to a personalized formula to variable prices that can be obtained from dataphone according to multiple criteria.

The difference between CBDCs and other currencies is that they are backed by central banks. This means they are designed to comply with certain legal requirements. For example, a bank might determine that a user’s identity should be related or create specific uses.

At the gates of a financial revolution. IMF data is highly representative. 81 central banks, representing 76% of the world’s population, have shown interest in implementing these CBDCs in recent years. And according to the IMF, two-thirds of them are expected to implement them before the decade is up.

The following statement from the IMF explains well the different implications of these different government-backed digital currencies:

“CBDCs are likely to have profound effects on monetary policy and financial stability. CBDCs can strengthen the availability, resilience and efficiency of payment systems and increase financial inclusion. However, if poorly designed, CBDCs can also lead to financial stability risks, data privacy. and legal challenges, cyber risks, and central bank operational risks.In addition, the widespread use of CBDCs can change the configuration of the international monetary system.CBDCs can reduce the number of intermediaries in cross-border payments, encourage competition and increase transparency.On the other hand, foreign CBDCs can easily access, currency substitution and volatility in capital flows.

There is nothing.

Towards the end of financial (and general) privacy. If cash is already losing the war against electronic payment, with the advent of CBDCs this conflict intensifies on several levels. CBDCs allow central banks (governments) to record and verify all transactions, including all relevant details.

The reality is that central banks may require linking the user’s identity to their digital portfolios, which practically means the end of anonymity. If we make any payments, this information can be easily accessed by the authorities. This can have numerous consequences.

Security measures should be requested. The fact that CBDCs have the ability to record all transactions does not mean that this will be the case. It’s still early days, but technically CBDCs can also be used with anonymous and private transactions without being traceable. Equivalent to end-to-end encryption with instant messaging.

This discussion of the level of privacy of different CBDCs is expected to be repeated in the coming years. European institutions are already quite aware, at least when it comes to the digital euro.

Zuckerberg’s dream was overshadowed. The Facebook founder knew how to see the potential of a world-class stablecoin tied to major currencies. The Libra project failed, but it was the European Central Bank’s proposal that caused it to take CBDCs very seriously.

Central banks have hit crypto in their field. A few years have passed and an epidemic and CBDCs are taking shape. The digital euro does not seem to arrive before 2025 and there are still many unknowns as to how it will be implemented.

What we’re seeing is how central banks are talking openly about the creation of digital currencies. While cryptocurrencies promised a decentralized financial system and fintechs struggled to educate users, central banks had the opportunity to fight face-to-face in the world of digital finance at CBDCs.

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