Central banks all around the world are planning to introduce a new kind of money known as cryptocurrency. With the rise in popularity of crypto around the globe, many nations have thought of central bank cryptocurrency, which will act as an alternative to the fiat currency that is prevailing.
In this idea, China has been at the forefront. In April 2020 Beijing confessed that they would be expanding their pilot program for an electronic payment structure that can be accessed completely at home.
In the present scenario, there are two-tier banking system in most economies that includes –
- The commercial banks which are the banks for the people.
- And the central bank which is the bank of the banks.
A central bank performs a number of surveillance activities but at the same time, it also creates the base money formulated by banknotes. Bank accounts are debts that each commercial bank has with their customers and that are payable at banknotes. But in recent times the amount of cash in bank accounts has surpassed every attainable amount of banknotes, so there is no point for a company to go to a bank and say “Hey, I want my money back in banknotes.”
Above that, people are moving away from the use of banknotes. If somebody travels to countries like Iceland or Norway they will see that the use of banknotes is really limited now for varied reasons.
Why Do Central Banks Want To Introduce Digital Currency?
The pandemic all around the world is currently shifting people away from using physical cash in most of the economies and people are choosing to use alternative payment methods and private cryptocurrencies.
For these reasons, there are presently many nations that are planning to create their own central bank cryptocurrency. One such example is the E-Krona project by the Sweden bank. They have a payment gateway that has all the characteristics like banknotes, the only difference is its electronics. So it is a peer-to-peer gateway but electronic.
At this time, the People’s Bank Of China (PBOC) is the first central bank that is ready to launch its digital currency. They have already completed the test phase and are ready to inaugurate the “digital yuan”. This “digital yuan” is not based on the blockchain algorithm. PBOC is conscious about not endorsing any particular technology strongly.
In recent times many banks, hedge funds, and even pensions include digital currency in their investment sphere. But above that many centralized banks and financial institutions have launched their cryptos known as stablecoins.
Stablecoins For Central Bank Cryptocurrency
As the name suggests, stablecoins are more stable compared to traditional cryptocurrencies. One main concern that crypto enthusiasts have is that they are very fluctuating, especially coins like Bitcoin. But stablecoins are much less fluctuating as they derive their value from the assets that provide the backup. For example gold and real estate.
On the other hand, cryptocurrencies derive their assets from utility and conjectural attributes. Along with that, stablecoins represent other assets apart from the only coin. So it can be said that stablecoins control the digital currency technology but are more like traditional assets.
Blockchain Based Banks
One of the most enlightened differences between cryptocurrencies like Bitcoin and stablecoins like JPM coins is that one is decentralized and the latter is centralized. This means that Bitcoin runs on a simple yet strong code. Transactions here are approved collectively and then confirmed and then added to the Bitcoin ledger. This public ledger records each and every Bitcoin transaction.
Banks on the other hand use the same technology but they are required to take permission and are private. Therefore centralized bank’s blockchains work under a managed ecosystem, where the transaction of stablecoin is private.
JPM Coins From J P Morgan
The JPM coin is known to be one of the first huge investment teams to use cryptocurrency technology. It is a crypto coin that allows account settlements in just one day. Typically transferring money from one person to another does take time especially when that is a large sum.
The real positive aspect of cryptocurrency is the efficiency of payments. The JPM coin is a settlement coin that represents $1. People holding this coin have the ability to redeem it for dollars. All of this is carried out on private Ethereum blockchain technology.
Future Projects Of Central Bank Cryptocurrency
Presently the use of stablecoins has increased including Tether, True USD, etc. Even an important Bitcoin exchange will also have stablecoins such as coins from Coinbase. These coins are all primarily fiat currencies. The main function of these coins is payments that are exchanged from dollars, Yen, and many more. Other projects involve Japan’s Mizuho Bank, China’s People’s Bank Of China, and many more.
Advantages Of Central Bank Cryptocurrency
With central bank cryptocurrency, it is always that they use stable coins that run on a centralized private blockchain. Also, these are backed up by assets that are very relevant to the real world. The advantage of this is it increases the speed and ease of transactions and discards borders. It also provides the users with more transparency by allowing them to track all transactions that are available on the public blockchain ledger.
Limitations Of Cryptocurrencies Issued By Central Banks
Central banks that have formulated their cryptocurrencies so far have mainly created stablecoins. These coins harness the crypto technology but not the essence of digital currency. This is one of the reasons that inspired the formulation of Bitcoins that is completely a non-fiat currency. Putting the crypto technology on stablecoins does not justify the ethos of decentralized transactions and they are controlled by external factors and are highly regulated just like traditional artifacts.
Nations have realized the importance of central bank cryptocurrency and many banks are taking active decisions towards formulating private cryptocurrency. There are already many central banks that have started their projects on the formulation of their own digital currency and China is leading in this race.