Much of the recent policy debate over virtual currencies has been alarmist, with commentators going so far as to call for banning all cryptocurrencies or warning that U.S. efforts to develop digital dollars would wreck the banking system. The conversation around central bank digital currencies, or CBDCs, illustrates the point.
Whereas cryptocurrencies like Bitcoin are decentralized, CBDCs are issued and managed by a nation’s monetary authority. The idea has taken off around the world in recent years, largely in response to the rapid pace of digital innovation and to frictions within the existing financial system. Over 80 countries are in some stage of researching, developing or rolling out their own version of this novel monetary technology.
In the emerging digital “moneyverse,” CBDCs could empower governments to practice more monetary flexibility and directly interface with citizens, which could be useful, for example, in rapidly distributing stimulus funds or reducing overdraft fees. CBDCs could also help non-banked or underbanked communities access the formal financial system, with all its attendant benefits. Some countries’ central banks are already trying this out in the real world, such as in the Bahamas, which has circulated a digital “sand dollar.” The People’s Bank of China, in particular, has garnered much attention for deploying a digital yuan in 28 major cities, ahead of a wider rollout timed with the 2022 Winter Olympic Games in Beijing.