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The future of central bank digital currencies

Bitcoin (BTC), Ethereum (ETH) and Co.: Decentralized digital currencies are on the rise and are being used more and more around the world. But a new player is already in the starting blocks: GovCoins. They could usher in a new era of means of payment and end the era of systemically important banks.

 

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The hype surrounding Bitcoin has recently drawn more and more attention to digital currencies. No wonder: After all, by far the best-known cryptocurrency has increased its value from 0 euros to an interim high of over 55,000 euros per Bitcoin in just 12 years (2009-2021). 

But also well-known FinTech companies such as PayPal, Skrill and TransferWise are currently experiencing an upswing and thus increasing user numbers. In 2021, PayPal now has 392 million users and other digital financial service providers can also convince with similarly high numbers.

But while cryptocurrencies and FinTech solutions from private sector companies are currently attracting the most attention, the real revolution could unexpectedly come from a completely different direction: in the form of so-called government coins.

What are GovCoins?

GovCoins are state digital currencies that are managed and made available directly by the responsible central banks instead of commercial banks. While the value of ordinary cryptocurrencies fluctuates and remains volatile, the value of GovCoins is always stable as it is set by the respective central banks.

The great benefit of GovCoins is quickly explained: Instead of having a current account at a conventional bank, GovCoins will in future be able to do this with a digital account at a central bank, which can then be accessed via a secure counterpart to app interfaces such as ApplePlay or PayPal can access.

Do you want to order from the delivery service, send money to your relatives abroad or make easy payments on vacation at the other end of the world? No problem, with GovCoins this is possible without any fees, long waiting times and disproportionate exchange rates.

In this future, cash and credit cards could become obsolete. But not only that, commercial banks could also be less and less relevant. They would simply no longer be needed as a classic intermediary if you can open an account with the central bank. Your own money would be 100% secured by the respective central bank and safe even in severe banking crises — after all, central banks cannot go bankrupt.

What do GovCoins mean for commercial banks?

Over 50 global monetary authorities are now actively exploring or even implementing digital currencies. For example, the Bahamas in October 2020. The island nation is thus the first country in the world to have introduced a fully digital version of the national currency. 

Other countries are already ready. First and foremost China, which wants to be the first big player in the global economy with the Digital Yuan (e-RMB) to revolutionize finance with GovCoins. The European Union has also announced a digital currency for the year 2025, the so-called »digital euro«. In the US, the FED is actively working to digitize the dollar, and in the UK, the feasibility of a »Britcoin« is being examined by a working group from the British Treasury and the Bank of England.

One reason for this global push is the fact that central banks want to retain control of the financial system. Because as more and more deposits, loans, and payments migrate to digital domains under private control, it becomes increasingly difficult for central banks to steer and oversee the financial system. Private networks could emerge and become lawless places where fraud and abuse of privacy are wide open.

For commercial banks, this advance of GovCoins could mean uncertain times, because as more people store available funds in central banks, commercial bank deposits will dwindle and lenders will have to find other ways to sustain their lending business. If their financial resources are no longer sufficient, other players will have to carry out the lending, which remains important for the founding of companies, among other things. What that means? Quite simply: in the long term, central banks could also participate in lending.

What other advantages and disadvantages do GovCoins have?

While it is largely undisputed that a correctly executed implementation of so-called Central Bank Digital Currencies (CBDC) can enable more efficient global financial transactions, better transparency and a more secure financial system, GovCoins also represent a technology that authoritarian states like China use to control their citizens and too can sanction. For example, through digital penalties and temporary bans as well as confiscation of funds. 

In democratic states, however, such risks are rather unrealistic, since the protection of privacy is a basic democratic right of the people. Within the European Union, personal bank and account data are also subject to special protection since the General Data Protection Regulation (GDPR) came into force. 

The new technology offers another advantage in the fight against crime. The increasing use of Govcoins would help curb financial crimes such as tax evasion and money laundering. Counterfeit money offenses in particular would be made extremely difficult by the introduction of GovCoins, since the programmed money is based on the same technology as cryptocurrencies: blockchain.

Additionally, the launch of GovCoins could create a more inclusive banking system that all people would have equal access to. In particular, people without a bank account would benefit from this worldwide. At the same time, central banks would get a more accurate overview of the money supply and could react better to systemic risks such as inflation or other dangers. 

For smaller countries, however, foreign GovCoins could also pose a threat to the local currency and thus the national economic system if a large part of the population decides to use GovCoins from other nations.

Finally, GovCoins could also significantly influence world politics and, through cross-border payments, offer alternatives to the US dollar, which is the current world reserve currency and is an important part of American dominance in the international financial market. 

The Future of GovCoins: What Can We Expect?

For democratic states, GovCoins represent an exciting but also challenging development for which both governments and financial institutions must prepare and get ready. This is true in areas such as data protection, central bank reforms and the fact that commercial banks may be forced to fundamentally rethink their core business in the future.

After all, individuals and companies could benefit enormously if central banks issued their own digital currency. You could switch to a cheaper, more convenient, and even safer alternative. Ultimately, all payment transactions could be safer, more convenient and cheaper if commercial banks were no longer acting as intermediaries. 

However, the development of GovCoins is just beginning and even if all test phases are completed, it will probably still take a few years before the widespread use of GovCoins for people becomes a reality. According to the US Federal Reserve, GovCoins would initially only be introduced as a supplement to cash and bank money. The same will be the case in the European Union and Great Britain.  

With the Digital Yuan (e-RMB), China will be the first major country to make GovCoins available to the general public in the near future. What that means for private platforms such as AntGroup and its digital payment solution AliPay, used by over 1 billion Chinese, remains to be seen.

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