CBDC: Technology of the Future or Dystopia?

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What is a CBDC?

Central Bank Digital Currencies (CBDC) are virtual national money. The idea of ​​creating such coins came to the authorities after the success of cryptocurrencies, which also exist only in digital form.

Unlike Bitcoin and Ethereum, CBDCs are centralized and regulated by central banks and thus offer less freedom and anonymity. At the same time, the transition to a digital currency promises many positive changes that can favorably affect the countries’ economies. In this article, FBS analysts examine the nature of CBDCs and explain which assets can outperform because of them.

Who has already started developing CBDC

The list of countries that have shown interest in creating a digital currency is extensive.

China

The country began to actively develop a CBDC in 2019, but the COVID-19 pandemic significantly accelerated this process. In 2020, experiments on the introduction of the digital yuan were conducted in several cities in China.

In January 2021, the Agricultural Bank of China (ABC) tested the functionality of exchanging e-CNY for fiat money at regular ATMs in Shenzhen. In the spring, six of the largest financial institutions experimented with creating digital yuan wallets.

By the end of October 2021, 140 million people had opened e-CNY wallets.

European Union

In October 2020, the ECB published a report on the possibility of creating a digital euro. The regulator assumes that digital currency will become a full-fledged substitute for fiat money. In mid-July 2021, the ECB announced the start of a phase to study the possibility of creating a CBDC.

Sweden

One of the pioneers in the creation of CBDC is Sweden, a country that may be the first in the world to refuse to use cash. From 2010 to 2020, the number of people in Sweden who pay for purchases in cash fell from 39% to 9%.

Additional countries are testing CBDC implementation, such as Japan, the Bahamas and Russia.

The bright side of CBDC

CBDCs can significantly change the financial system. For example, CBDCs will increase the transparency of payments and government control over the spending of budget funds because governments will track any transaction with these digital assets.

The authorities will be able to finance state projects using smart contracts, ensuring that money is spent only for its intended purpose. As a result, officials and entrepreneurs will no longer be able to "to lose" billions from the state budget. The volume of the shadow economy will decrease, and it will become impossible to work illegally.

For central banks, one of the main advantages of CBDCs is that it will be easier for them to regulate monetary policy. The transition to digital finance will allow them to control the economy and respond to real-time changes. As a result, stability and security within the system will increase. Moreover, CBDCs will help banks reduce the costs of transfers (including cross-border).

The dark side of CBDC

The widespread use of CBDC brings not only benefits but also huge risks associated mainly with the tightening of government control over society.

CBDC is an ideal tool for total state control over most aspects of citizens’ lives. Let us see how this control will be exercised.

Financial transparency

The state will see not only a person’s income but also their expenses. The authorities will be able to compare whether your expenses match your income and automatically remove taxes on all income. And, of course, the government will be able to block the user’s CBDC wallet at any time.

Consumption rationing

CBDCs allow governments to monitor and regulate the level and quality of consumption. Smart contracts can be set up so that people can’t buy what they don’t have to, or they will automatically be taxed for overconsumption.

Motion control

CBDCs allow restricting the movement of citizens without any QR codes, residence permits, and document control. It is enough to limit the territory or duration of spending digital currencies. It will be easy to regulate passenger flow and traffic. For example, you can only pay for the subway from 7 to 9, while your neighbor can pay from 9 to 11.

Support for the social rating system

Suppose that a country has introduced a system of social evaluation where some categories of the population receive more privileges and opportunities than others as a reward for some services to society. People with a high rating can be completely free to manage their money. At the same time, those with a low status, on the contrary, can be limited in using money: for example, forbidding high-ranking citizens to visit establishments or limiting consumption to the necessary minimum.

An analogue of such a system already works in China. The current situation with QR codes implements the same idea.

Cryptocurrencies as an alternative to total control

As you can see, CBDCs are the exact opposite of cryptocurrencies. Decentralized digital assets are designed to provide people with financial freedom. In contrast, central bank digital currencies are designed to give the state a tool for total financial control over citizens.

We hope that most of the gloomy predictions above do not come true. If so, then cryptocurrencies will become one of the alternatives for those who want complete control over their lives and finances.

How will CBDCs affect the markets?

With the possibility of losing control over their savings, institutional and retail investors may start buying real assets like gold and silver in droves. Therefore, FBS analysts believe that the precious metals market can demonstrate exponential growth in the next decade.

XAUUSDmonthly chart

XAUUSD formed a global cup. Currently, the price is forming a handle. If it breaks above the blue trend line, XAUUSD will move to $2500 and $3000. By the end of the decade, the price could easily reach $3400 per ounce.

As for investment, silver has even more potential than its big brother has. Silver is actively used in the chemical industry, battery production and production of parts for the electrical industry, so the demand for this metal is constantly growing.

XAGUSD, Monthly chart

XAGUSD also looks bullish, with the main target at its all-time high of $48. However, the buyers will be able to break through its historical resistance with the third attempt. In this case, silver will quickly reach $75.

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This article was written by ForexLive at forexlive.com.

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