The emergence and impact of CBDCs

The launch of a prospective BRICS digital currency would likely reshape the world economy beyond recognition, and all the world’s larger economies will likely move towards launching some form of CBDCs (Central Banking Digital Currencies) within the next seven years, if they have not already done so. However, this does not necessarily mean that CBDCs will fully replace other forms of currencies in those countries.

Programming CBDCs

CBDCs will have a unique, and potentially life-altering characteristic: programmability. Unlike paper money, or even electronically maintained bank balances, CBDCs will be programmable. A CBDC is a digital currency issued by the central bank or government of a country and it can be programmed in a way which dictates how the holder of the CBDC may spend their own fiat digital currency. CBDCs may be set up to limit spend on specific items for a whole host of reasons or, indeed, spend on supporting specific causes. For example, Singapore is developing ‘Purpose Bound Money’ which would be programmed with logic requiring certain conditions to be met before such money can be released or ‘unbounded’ in order to allow it to then be spent.

The programming of currency is different to the automation of payment streams. The automation of payment streams is of course all around us and is not controversial. Good examples are direct debit arrangements and, more recently, smart contracts. These relatively uncontroversial automations of payment streams are not to be confused with the newer, and entirely separate, concept of programmable currencies.

Programming CBDCs would involve setting spend limits on specific items or limits on payments to specific causes. So that even if an individual has money in their account or to their name, they won’t be able to use their money in certain ways if specific programmed limits are triggered. Like anything, there are pros and cons. The best way to counter the cons and the much-talked-about risks of CBDCs is to ensure independent supervision and effective regulation over any programming of CBDCs.

The BRICS nations

The BRICS nations (Brazil, Russia, India, China, South Africa) have made huge strides in the development of their own individual CBDCs and appear to be in a position to move towards conducting high-value cross-border trades with their CBDCs in the short to medium term. Some BRICS member nations are exploring co-launching new digital currencies in unity with BRICS-friendly nations. The most poignant development, though, is yet to come. The BRICS nations are deciding whether to increase usage of local currencies or develop their own unified BRICS digital currency, potentially even backed by gold.

A unified BRICS digital currency might reshape the world economy beyond recognition in the decade to come. The longer-term effect of the prospective launch of a BRICS digital currency might be to inspire, or perhaps goad, other groups into following suit shortly thereafter and create a unified European digital currency or a unified G7 digital currency.

How will CBDCs impact geopolitics?

One of the ways in which the emergence of CBDCs will impact geopolitics is the use of CBDCs as a vehicle for cementing political alignments between powerful nations and for facilitating strategic shifts in global power. A quick glance at which specific countries are aligning with each other to plan launching joint CBDCs reveals patterns which undeniably reflect existing geo-political trends.

CBDCs could also deepen the divide between countries where citizens are accustomed to freedom and minimal state intervention versus those countries where citizens are subject to a greater degree of state intervention. That divide could increase as CBDCs emerge on the global stage because of the inherent characteristics of CBDCs, particularly programmability. CBDCs can be programmed in a way which dictates how the holder of the CBDC may spend their own money.

The regulation of CBDCs

When considering the most effective way to regulate CBDCs, a key question to ask is whether the harmonisation of regulations governing CBDCs globally is desirable or even possible. Trying to achieve such harmonisation or some degree of consistency between regulatory frameworks governing CBDCs across different countries would be quite challenging not only because of differences in taxonomy and terminology but also differences in political climates within each country and the differing approaches to decentralisation and freedom in general in different countries.

Regulation is not static, so even if harmonisation across countries is achieved, it does not mean that it will be maintained and if not approached in the right way, there will be divergence in all directions very quickly. The primary question to ask, considering the programmable nature of CBDCs, is who will regulate the programmers.

Whilst CBDCs are being explored and launched in a few places around the world, the global infrastructure is not in place, as yet, to begin implementing CBDCs across the globe in a more extensive way. In reality, there are great swathes of the world’s population which still use cash day to day, despite the proliferation of credit cards and electronic payments so it is questionable whether they could be persuaded to adopt CBDCs.