Digital Currency ….Should I care?

Recently the Bank of Jamaica (BOJ) minted Jamaica’s first batch of central bank digital currency (CBDC). A total of J230M dollars in CBDC will be issued to deposit-taking institutions and authorized payment service providers during the CBDC pilot exercise which ends in December.

I know there are a lot of buzz words floating around and a lot of average citizens have no idea what this even means and if no one understands it then this will definitely reduce the adoption. Here are a few key terms:

• Digital currency is the generic term for money that exists in the digital space (non-physical form). It is also called digital money, electronic, electronic currency, or cybercash. Despite being non-physical, you will be able to purchase your daily goods & services.
• Central Bank Digital Currency (CBDC) is a digital form of central bank-issued currency and therefore is legal tender.
• Legal tender means CBDC can be exchanged dollar for dollar with physical cash(fiat).
• Fiat money is a currency established as money, often by government regulation.
• Blockchain technology is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system.

CBDC pioneers

We aren’t the first country to be piloting or implementing digital currencies according to the Atlantic Council which is tracking CBDCs 81 countries (representing over 90 percent of global GDP) are now exploring a CBDC. 5 countries have now fully launched a digital currency including The Bahamian Sand Dollar which was the first CBDC to become widely available. China is also racing ahead with its digital yuan which could be heavily used during the upcoming 2022 Winter Olympics. That being said, we have examples abound of what the application of CBDC could look like but here are some practical advantages and disadvantages of using a digital currency that we ought to consider:

ADVANTAGES OF USING DIGITAL CURRENCY

• CBDCs can provide a considerably cost-efficient alternative to cash for value storage. The cost factor is lower in CBDCs as it doesn’t have the burden of costs associated for production, storage, transportation, and disposal. At the same time, CBDCs also present safe alternatives for distribution and reduction of concerns regarding fraud and theft in the payment ecosystem.
• Improved Financial inclusion. Central bank digital currencies could help in improving the access to digital payments for a majority of unbanked households. CBDCs can help users in accessing current digital payment tools at considerably lower or zero costs, without a bank account.
• The introduction of CBDCs could also increase competition in the payment systems landscape. This can also foster innovation among private players in the payment industry. Furthermore, central bank digital currency pros can also increase competition among banks. Banks would compete for attracting bank deposits related to assets that could possibly migrate to CBDC.
• CBDCs could play a crucial role in increasing the speed of transaction settlement and we could have real-time payments.

DISADVANTAGES OF USING DIGITAL CURRENCY

• CBDCs have prominent geographic restrictions as they are accepted only in the country that issues them. So in our case the BOJ CBDC can only be used in Jamaica.
• Central banks could turn into direct competitors of payment service providers, thereby forcing banks to lose income. As a result CBDCs can lower bank lending to the general economy and economic growth.
• Increased competition for commercial banks. The nature of CBDCs as a substitute for bank deposits can motivate banks to increase their deposit rates.
• Citizens could pull too much money out of banks at once and purchase CBDCs, triggering a run on banks.

As we take steps to embrace the digital economy the implementation and adoption of the CBDC is left to be seen. So stay tuned as we will help break down what this means for you.