An article named Technology and Sovereignty was published by Foreign affairs in 1980. It threw light on the fact that international monetary policies and financial markets will be changed due to technological innovations in the future. They predicted that this can change the balance of power on a global level. This was proved to be true as the internet revolution changed the whole world by introducing a new era of financial globalisation.
Due to the global financial crisis, there was a need for a truly international currency. Bitcoin was introduced to serve the purpose but being highly volatile, it is used as a speculative financial asset instead of being circulated for international payments.
All the countries are adopting digital solutions for the current problems in their financial and banking systems. Central banks across the globe are trying to solve financial system issues by introducing digital currencies. Many cryptocurrencies have become popular in recent years along with the world facing the covid 19 pandemic there has been a need for cashless transactions to control the further spread of the virus. The interest has been increased in developing a central bank digital currency that could cater to all the current issues in the financial markets.
There has been an increase in digital currency development by the central banks across the world in the last year. Many central banks are currently spending on the research and tests related to introducing a CBDC.
Recently in 2020, the first official launch OF CBDC was done by The Bahamas. They named their digital currency the Sand dollar. It is the digital replica of their currency in circulation to provide more easy access to financial services to the public. Collaboration was made with MasterCard which gives an option of transferring digital currency to traditional currencies. It facilitates the financial transactions made in the countries where MasterCard is accepted.
A survey was done by the Bank for international settlements to check the current status of developing a central bank digital currency globally. It included 65 central banks from around the world. It revealed that 86% of the central banks are currently working on developing a CBDC. They are trying to develop a digital currency that safeguards the public trust in the national currencies as well as help them in achieving their financial system objectives. Creating Price stability and safe payment infrastructure is also one of the main objectives of the central banks. New digital currencies issued by the central banks will be the replications of their traditional money.
The evolution of cryptocurrencies is proof of a tech-driven global monetary system. The use of cryptocurrencies has increased in Nigeria in recent years. The security exchange commission of Nigeria made regulations specifically for digital currency. The central bank of Nigeria also played a pivotal role in defining cryptocurrency under the financial regime of the country.
Bitcoin was introduced as a decentralised money system in which there won’t be any interference from a third party like the government or financial institutions. Blockchain-based Cryptocurrencies evolved as legal tender money. There are many reasons for adopting the central bank digital currency. It is adopted depending upon the population and maturity of the financial system of the country.
Global Policy House recently organised a conference about Central Bank Digital Currency in Africa. The central bank of Nigeria states the central bank digital currency as fiat money and not a cryptocurrency. It decided to create the digital form of the naira to serve as a CBDC. As this currency is backed by the central bank so sole liability in case of default of this money lies with the central bank of Nigeria. The founder of the Global Policy House stated that CBDC should be explored by the authorities as it will be the future of the monetary system in the coming decade.
Major arguments given in the favour of the CBDC are that it provides access to legal tender in case of a cash shortage or unavailability of cash in the financial system. Some also argue that in a post covid world digital money is the solution to stop the further spread of the virus.
Many countries do not fully trust cryptocurrencies as a permanent monetary solution. Nigeria also warned its public about using cryptocurrencies. Despite the warnings given by the central bank of Nigeria, the public is still interested in dealing with digital assets. Nigeria is one of the top countries dealing in cryptocurrencies.
Nigeria, however, has held off having any direct relationship with cryptocurrency. Regardless of its warnings, Nigeria continues to make the top countries in the world carrying out peer-to-peer cryptocurrency transactions as well as occupying the top position in search of bitcoin across the world.
Despite the arguments whether it is good or bad, the majority of the population is interested in using a digital currency for their monetary transactions. Because of this increasing interest and changes in the global financial systems, many central banks are developing a CBDC.
In the case of creating a CBDC, the following factors will play a key role in its development.
Central banks need to make clear policies about a central bank digital currency design. The majority of stakeholders must promote the concept of using a CBDC. A strong legal framework should be implemented for the issuance and distribution of CBDC. Central banks should ensure the efficient use of digital currency within the economy. Necessary money market reforms should be done so as to make digital money easily accessible and adaptable.
Strengthening all the above-mentioned policies could change the general perception of the public in case of adopting the digital currency and its issuance. It will take time to create a supportive global monetary system that will use only digital currencies. But there is no doubt that digital currency is going to be the future of the global financial markets.