Research into, and development of, digital currencies among central banks have their roots in the 2008 recession. Current global turmoil has only increased the urgency of a concrete adoption timetable.

When we speak about cryptocurrencies today, many immediately think of bitcoin or similarly structured digital coins. Central Bank Digital Currencies (CBDC) are a regulatory reaction to the 2008 recession and an acknowledgment of the benefits of having a digital alternative to fiat cash. They may not be exactly the same but the effects on both will be enormous.

According to the Bank for International Settlements (BIS) in January of this year, before there was even a mention of the coming economic upheaval, 80 per cent of central banks were researching the idea of digital currencies. As far back as August 2019, Mark Carney, then Bank of England governor, pointed out that “should an increase in the share of trade being invoiced in digital currencies increase, shocks from the US would have a less potent spillover to other countries”. 

While the introduction of Bitcoin sought, among other issues, to address the question of decentralisation, a central bank doesn't necessarily have this requirement. In effect, a CBDC will allow central banks to directly connect with the individual's bank account when it needs to, bypassing middlemen and getting money into the system quickly.

The direct effects will include the government's complete control of and visibility over your earnings, spending habits, and tax liabilities. In the absence of paper money, the black economy may simply disappear. It’s only natural to assume that decentralised currencies like Bitcoin will be used by many multiples of the current user base in such a scenario.

Helicopter money

It is a well-known axiom that governments (and central banks) are always fighting the last war and it’s unlikely plans will have progressed far enough to address the current crisis. That doesn't mean, however, that the adoption of CBDCs will slow down once the current crisis subsides. 

The requirement to get money to individuals and small businesses was an immediate reaction to global shutdowns but the inability to do so was starkly exposed once these programs were initiated. The small percentage of earmarked funds actually reaching SMEs are an obvious example.

Central banks now recognise that to be effective in countering modern systemic shocks they simply have to adopt some form of digital currency.

Slow is smooth. Smooth is fast

Those expecting a speedy and complete introduction of CBDCs will be disappointed, as central banks continue with their research and stress testing. Among the normal economic theoretical issues to be considered are the additional real-world issues thrown up during the short history of existing digital currencies.

Inflation concerns, a reluctance by people to adopt a purely digital economy, the effect on the existing banking sector and its business model are just some of the concerns that are under scrutiny. As with the adoption of the euro, who is to say that we don’t eventually arrive at one global currency? 

One of the most obvious effects will be that cryptocurrencies will no longer be an alternative investment. Using the massive power of persuasion of national governments, the adoption of digital currencies by normal individuals will be immediate. In such an event, cryptocurrency's exposure today will look like a small grey spot on the moon, rather than tomorrow when it becomes the moon itself.

PayPal’s experience, a recent convert to cryptocurrency, will be closely watched by central banks for how users interact with a digital option. Their CEO, Dan Schulman, commenting in a recent CNBC interview, observed that “people are flocking to digital payments and digital forms of currency” but risks still remain.

Implementation

The actual mechanics of implementation will also be hugely important. Many central banks have already admitted to using the Bitcoin growth model as a basis in their studies when trying to determine how digital currencies may grow and how best to counter people's concerns.

Rob Frye, the American CEO of Malta-based cryptocurrency platform, Xcoins, has explained how their focus on 24/7 live customer support has had as much impact on their business growth as the general public’s increased interest in cryptocurrencies.

“There’s not much point developing something if people simply don’t understand or aren’t comfortable using it. Suffice it to say that CBDCs will have to be accompanied by massive user information campaigns and support infrastructure underpinning any launch,” he said when recently interviewed on the subject."

'Bitcoin' for the masses

This is no longer an 'if' but rather a 'when' proposition. It only took six years for adoption of the euro with most experts expecting accelerating CBDC adoption to have a game-changing impact on all of our lives very soon.

Disclaimer: The information provided in this article should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.