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Amid the rise of cryptocurrencies, the idea of central banks launching their own versions of digital currency has been in the offing for quite a while. In April 2020, the People’s Bank of China (China’s central bank) launched the Digital Yuan, with an estimated 150 million renminbi ($23 million) now in circulation. Granted that considering the size of the Chinese economy, the experimental amount of Central Bank Digital Currency (CBDC) is minuscule, yet China aims to significantly increase the use of this currency by the time the Winter Olympics in Beijing take place in 2022. Not to be left out of the race, US Federal Reserve Chairman Jerome Powell has indicated that the plan to introduce a digital dollar is in full swing. This phenomenon is likely to influence monetary policies in other nations.
The CBDC is a digital form of fiat currency issued by the central bank of a country. The issuance of this form of currency basically circumvents commercial banks and creates accounts for citizens directly controlled by the central bank. This type of currency is not the same as electronic money already in use. Electronic money used in the present monetary system is convertible into cash when an account holder in a bank wishes to make a withdrawal, which is not the case with CBDCs. Presently, most people are familiar with digitalized payments platforms such as PayPal, Alipay, Google Wallet and Apple Pay, among others.
However, digital wallets are linked to bank accounts of individuals, and are not the same as pure digital currencies. A survey by PricewaterhouseCoopers in March 2021 indicated that only one in 10 people in North America and Western Europe were aware of the difference between digital wallets, CBDCs and other forms of digital currencies, such as cryptocurrencies that are currently in use.

Concerns over privacy, cybersecurity and potentially unbridled control over individuals by governments may be realistic issues that need to be debated and resolved.

Dr. Suaad Jassem and Dr. Mohammad Rezaur Razzak

Cryptocurrencies such as Bitcoin, run on a distributed ledger model operated through blockchain technology, may be considered the most decentralized form of currency so far. Meanwhile, some of the technology behemoths such as Facebook have also launched their own digital currencies. Others such as Amazon, Google, Twitter and Baidu are also moving full steam ahead with their own versions, too.
Issuance of CBDCs may be considered a paradigm shift in the evolution of money in human society. This is because CBDCs are a direct liability of central banks, and citizens would hold the accounts directly with the central bank without any intermediary role of commercial banking organizations. Once the major economies of the world launch their own digital currencies, it is expected that by 2030, more than 70 percent of the world’s central banks will issue CDBCs. This could mean that the role of commercial banks would be minimized over time, and possibly make them redundant. The advent of CBDCs is expected to bring a lot of advantages for both governments as well as citizens, such as the elimination of intermediary transaction costs. However, there are also major challenges that need to be considered, such as privacy of data and cybersecurity issues.
Furthermore, how such drastic changes will impact the global economic order is still not understood. The sudden urgency to launch CBDCs by major economies of the world is not just a competition between two economic superpowers, but has more to do with the evolution of money in human society. The questions that need to be asked are: Is this the future of money? And what will be the role of commercial banks be once central banks directly manage the accounts of citizens?
Whatever answers unfold over time to the above questions, one thing is quite obvious: That the proliferation of such a monetary system is likely to have a far and wide impact on the future of commercial banks as well as people around the world. Concerns over privacy, cybersecurity and potentially unbridled control over individuals by governments may be realistic issues that need to be debated and resolved.

• Dr. Suaad Jassem is the assistant professor of accounting at Al-Zahra College For Women, Muscat, Sultanate of Oman.

• Dr. Mohammad Rezaur Razzak is the assistant professor of management & family business at Sultan Qaboos University, Muscat, Sultanate of Oman.