Central Bank Digital Currency (CBDC) is just as big as cryptocurrency, but it’s entirely different. Countries like Jamaica, The Bahamas, China, and Mexico have tried or are in the process of trying their version of a CBDC – and there are many more countries set to follow suit. On the other side of the virtual coin – you have countries like El Salvador that have allowed Bitcoin to be a legal tender: and Costa Rica that have Bitcoin ATMs.
One thing is for sure, all versions of digital currency seem to be becoming a big deal and are all equally as important in the development of the digital era. Below, we’ll explore why the Caribbean is one part of the world introducing CBDCs.
What Is A CBDC?
In short, a CBDC is an electronic form of a fiat currency a central bank issues to individuals and businesses to make payments and hold value. It’s like fiat currency circulating at present – it’s the liability of the banks and therefore protected. For that reason, some people are saying it’s far less volatile than other digital currencies, for example, cryptocurrency, because people have the reassurance of the government and the banks.
The push for CBDCs derives from the current and very rapid evolution of digital economies. More businesses are accepting digital currencies like crypto as a form of payment, giving unbanked people financial inclusion they didn’t have before. There’s a need for real-time payments and more efficient cross-border finance interactions that CBDCs hope to solve. It’s hoped that the introduction of CBDCs will reduce expenses, help with the money flow, and increase financial inclusion, as stated above.
How Does It Differ From, Say, Cryptocurrency?
It’s easy to get the two confused because they’re so similar – but only because they’re both digital currencies. Cryptocurrency is, in fact, very different. CBDCs would use standard blockchain authorized by traditional technologies enabling people to make purchases. It uses decentralized blockchains and isn’t regulated or backed by central banks.
That’s not to say that cryptocurrency isn’t an exciting or useful form of currency. It’s, at present, the more favorable currency and more widely accepted. Only a few countries are trialing CBDCs at present, but many countries and businesses trading within those countries accept crypto as a valid form of payment. People can buy into crypto by finding the best coins to stake or trade and then use that to buy cars, clothes, cosmetics – the list goes on.
Is one better than the other? Well, both serve to push the boundaries of financial norms and inclusiveness by giving unbanked people a way of making online payments. The three big differences are cryptocurrency is not one single currency, CBDCs would have the backing and protection of the government and banks, and the way you use both are different.
The Eastern Caribbean Trials
You’ll notice that it’s countries not necessarily the ones with the largest populations or wealth introducing CBDCs, but wealth doesn’t need to come into it. Remember, wealth has nothing to do with it. CBDCs are an extension of the fiat currency already provided in that country.
In April 2021, the Eastern Caribbean Central Bank launched its CBDC pilot, DCash. Some of the islands included in the pilot were Antigua and Barbuda, Grenada, St Kitts and Nevis, and St Lucia. The trial was a success, and the public now has access to the Easter Caribbean digital currency app. It allows people who don’t have a bank account to register through the app and use the digital version of the currency. In some ways, it’s totally revolutionary.
The Western Caribbean Acceptance
The easter side of the Caribbean isn’t the only part exploring CBDCs – the Western Caribbean is joining in on the fun. Jamaica launched its pilot in early 2021 and has since rolled out its version of the CBDC. It first launched the trial by putting $230 million into circulation. Since then, Jamaica has followed suit with the rest of the eastern side of the Caribbean by launching a similar app for the public to use.
For parts of the world like the Caribbean – where banking isn’t necessarily as straightforward as other parts of the western world – it offers a chance to have protected finances and an easy way of making financial transactions.
The Limitations of CBDCs
Nothing is without limitations, and naturally, CBDCs pose a few threats. The first is the privacy of users. Banks and, indeed, the governments instructing run the risk of mishandling mass amounts of new data. That means there could be some level of disruption, especially if the apps, for example, don’t have the required level of security to deter threats. Banking fraud is on the rise, and a new app to store money opens a brand-new opportunity for hackers to work their way in.
There are other risks for banks – such as whether it’ll be scalable, whether it’ll cause disruption to the current form of fiat currency, and whether it’ll be worth the investment.
CBDCs are an interesting topic because they aim to break the norm of banking that we’ve been used to for many years. It’s no different from fiat currency, yet the way it’ll serve the public is unique. The combined advancements of cryptocurrency and CBDCs show we’re moving rapidly towards a digital era of financial management.