This transition towards digital currencies is not as radical as it might seem. Traditional banks have already embraced digital money. For instance, when a bank issues a loan, it doesn’t hand out physical cash. Instead, it credits a borrower’s account, digitally creating money in the form of deposits. This process demonstrates that the shift to digital transactions has already spread throughout our financial systems. The difference with CBDCs is that they are government-backed, ensuring stability while also taking advantage of the speed and efficiency that digital systems offer.
Given this background, it’s natural to wonder: why not simply adopt something like cryptocurrencies, which offer many of the same digital benefits? To understand why CBDCs are the future, we need to examine the flaws of cryptocurrencies and why they fall short as a reliable form of money.
Cryptocurrencies are often described as decentralised, innovative, and the future of money. But do they meet the essential criteria of money? The answer is no, and here’s why.
First, Cryptocurrencies are highly volatile. Their value can rise and fall dramatically in a short period, making them unreliable as a store of value or medium of exchange. Imagine receiving your salary in cryptocurrency, only to find out your wallet is empty by the next morning. This volatility makes cryptocurrencies unsuitable for daily transactions.
Second, cryptocurrencies are not backed or regulated by any government. While some see this as an advantage, it creates trust issues. If a crisis occurs, who guarantees the value of cryptocurrency? Without oversight, cryptocurrencies remain digital assets rather than currencies that cannot provide the same level of stability as government-backed currencies.
Third, the idea of decentralisation (the absence of a central authority) is often promoted as one of the core characteristics of cryptocurrencies, but this decentralisation introduces significant flaws. While decentralisation promises freedom from government or institutional control, it also means there is no central authority overseeing transactions, which leads to a lack of transparency. We do not know who the issuers or controllers of the currency truly are, making it vulnerable to manipulation.
In fact, the reality is that a small number of individuals control a large portion of the cryptocurrency supply, which erodes the ideal of decentralisation. These entities can create a monopoly while manipulating prices. Furthermore, the lack of regulation associated with decentralisation in cryptocurrencies complicates the accurate monitoring of transactions and money circulation in the economy. This lack of financial oversight is a critical issue in maintaining economic stability.
Finally, cryptocurrencies are limited in supply, restricting money creation while reducing the central bank’s flexibility in managing the economy and increasing production. Unlike CBDCs, where central banks can monitor every transaction, cryptocurrencies are largely unregulated, and the lack of a central authority means that they cannot respond to illegal activities, such as fraud or money laundering, effectively.
While cryptocurrencies have revealed these limitations, central banks have taken their innovation seriously and sought to integrate it into a more stable and secure system. CBDCs are digital tokens that address the many concerns raised by cryptocurrencies while offering a more controlled and reliable form of currency issued by a central authority. By introducing CBDCs, central banks can combine the best elements of both digital currencies and traditional financial systems, ensuring stability and trust.
CBDCs represent a major leap forward in modern financial systems. They eliminate intermediaries, significantly improving transaction efficiency. Unlike cryptocurrencies, which rely on a decentralised network, CBDCs are built with government-backed value stability and enhanced transparency. By using secure digital systems, central banks can maintain full oversight of transactions while balancing privacy with traceability to meet regulatory standards.
One of the key advantages of CBDCs is their transparency. Unlike physical cash, which can circulate without leaving a trace, CBDCs create a verifiable record of each transaction. This ensures financial oversight and helps prevent illegal activities such as fraud and money laundering.
However, there’s an important distinction between cash and CBDCs when it comes to transaction flow. With physical cash, we can track gross transactions, the total volume of money exchanged, but we can never know the exact amount of money in circulation. For example, a QR100 bill may pass through several hands, yet the actual circulation of that QR100 remains unknown, despite us tracking the number of transactions.
With CBDCs, this traceability can be more precise, allowing central banks to know exactly how money flows through the economy and manage the money supply with greater accuracy. Furthermore, CBDCs streamline transactions by removing unnecessary intermediaries. This not only reduces costs and processing times but also strengthens central banks’ ability to manage the economy during periods of financial instability.
In the past, central banks acted as lenders of last resort by providing liquidity to commercial banks, which would then distribute it to the economy. With CBDCs, this process can be done instantly by injecting liquidity directly into digital wallets, ensuring faster and more effective support during crises. By bypassing intermediaries, CBDCs can reduce transaction costs, making it more affordable for banks, businesses and consumers to conduct payments.
Another major benefit of CBDCs is their potential to improve financial inclusion. In many regions, people do not have access to traditional banking systems. CBDCs offer a way for governments to provide financial services to underserved populations. By directly issuing digital wallets, CBDCs can ensure that all citizens have access to essential financial services, including payments and savings.
While concerns about privacy and accessibility remain, these challenges can be addressed in the design of CBDCs. Some critics worry that CBDCs could give central banks too much control over personal transactions. However, privacy and transparency can coexist. CBDCs can include safeguards to ensure only essential data is collected. This protects individuals' privacy while helping to monitor to prevent illegal activities.
Concerns about technology accessibility are also valid, but the adoption of CBDCs can happen gradually. Initially, CBDCs can be implemented for interbank use before expanding to the public, giving time for infrastructure development and ensuring that no one is left behind.
In conclusion, CBDCs represent a transformative step forward in the evolution of money. They combine the stability and trust of traditional banking with the speed and transparency of digital technology. By eliminating intermediaries, CBDCs can improve transaction efficiency, financial inclusion, and economic stability.
As central banks continue to develop and refine these systems, CBDCs will become an increasingly integral part of the global financial system, paving the way for a more secure and efficient future of money.
In fact, the Qatar Central Bank has already started its investments in CBDCs.
Abdulla Ali al-Siddiqi al-Emadi is a Finance and Economics honor student at Qatar University
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