In a recent 27-page report, Kraken asked the following question: Why behind central bank digital currencies (NDCs) and highlights their various benefits and dangers. Kraken is one of the most popular digital asset platforms in the world. Its success is due not only to its longstanding presence, but also to the introduction of advanced technologies such as the Lightning Network and its designation as a licensed bank. As such, he is very familiar with the dynamics of LLDCs and what these plants might look like in the future.
Central bank digital currencies (CCDC)
Before we get into the developments around CBDC: what is it? These are digital assets, usually created using blockchain technology and issued by central banks – in simple terms, they are digital variants of the FIAT currencies that currently exist.
Kraken notes that there are actually two subgroups within CDDCs, both considered by different governments. There are retail options (as described above) and wholesale options, which are likely to be limited to selected groups that deal with central banks and require efficient large-scale value transfers.
In the near future, these assets could change the way governments and banks interact not only with each other, but also with the public on a global scale. Kraken explained: While the benefits of MCCS and its impact on society and governance remain to be seen, we believe that the global growth of MCCS has begun.
For a more in-depth look at what CBDCs are and how they work, you can read our overview HERE.
Who’s the game?
The country most often associated with the CBDC is China, due to the trial of its digital yen. However, there are several examples of countries/regions actively considering developing their own CBD options or already doing so. Kraken notes that this emerged in a recent Bank for International Settlements (BIS) study, in which 56 of 65 (85%) central banks passed on their interest rates. Following are some of the regions of the world that Kraken has identified as potential key players in the SDC field in the near future.
- United Kingdom
- United States
- Latin America
The above list of CBDD regions covers the entire world. With so much interest in these plants, one wonders why. While the benefits of CBDC are numerous, Kraken points out that the following features are of particular interest to governments.
If successfully established, issued and widely used, CSDs can enable governments to effectively track or monitor transactions and provide real-time updates on economic activity within a jurisdiction; payment systems can also operate smoothly and efficiently, offering near-instantaneous settlement at lower costs. Both are too attractive for central banks to ignore.
CDDCs are not only efficient for financial institutions, but also for the public. As a persistent example, Kraken cites the staggered distribution of the stimulus package in the United States. While the reasons for this problem vary, Kraken notes that the use of CBR can be seen as a much more efficient and rapid process whereby economic activity is stabilized by direct transfers from central banks to qualified individuals.
In this way, CDDCs can contribute to more effective interactions among financial institutions, but also with the public. On this basis, it is also possible to discuss the possibility of improving the effectiveness of the remittance/cross-border sector, which is based on mediation and the high costs associated with it. Kraken argues that traditional methods of cross-border transactions create a stream of intermediaries who hold accounts on behalf of customers or banks, known as the payment corridor … If MSRs are made globally interchangeable, so that one digital currency can be invoiced or exchanged with other sovereign digital currencies, then remittance payments will also create a dramatic shift and disruption.
While the benefits of CDDCs are broad and deep, the proposed facilities are not without drawbacks. After all, their safety, usefulness and value depend on the central bank that issued them.
This means that, like their physical counterparts, they are subject to scrutiny and invalidation – being digital, they are not immune to the actions of the issuing authority. It is this important point that makes Kraken believe in a future where cryptocurrencies will continue to flourish.
Cryptocurrencies are often a safe haven for people living in economies with hyperinflation and unstable political regimes that sometimes impose strict capital controls because of the instability. Under these circumstances, CBDCs will be nothing more than another unstable store of value, unlikely to provide stability against devaluation. We believe that those who want to circumvent governments or repressive regulations and rely on cryptocurrencies as a source of value and money transfer will eventually turn en masse to cryptocurrencies for privacy and financial security.
For those who fear that CBDM will be replaced by cryptocurrencies, that seems unlikely. The differences in the structuring of the two are sufficiently significant to allow both to find their place in the future global economy. Kraken repeated this and stated: CBD and cryptocurrencies clearly have very different purposes, so we think they will likely continue to co-exist.
Kraken believes not only that LLDCs and cryptocurrencies can coexist, but also that LLDCs will accelerate the adoption of the other and raise awareness of the benefits of digital currencies that are not tied to a government.
Ultimately, we think CBDCs can be an effective accelerator for cryptocurrencies if more people open their eyes to the reality of fiat and digital currencies.
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