The past few weeks have been rough for cryptocurrency. The collapse of FTX – already billed as one of the worst financial scandals in modern history – has severely damaged the legitimacy and value of cryptocurrency. Although there are other crypto exchanges and businesses still operating (including Ripple), there are questions about the future of digital currency. However, focusing only on cryptocurrency (specifically Bitcoin) ignores other forms of digital currency.
Digital money is part and parcel of modern living: we reach out for internet banking, mobile money and credit cards just as easily as hard cash. However, it isn’t synonymous with digital currency. There are three types of digital currencies: cryptocurrency, virtual currency and central bank digital currency. Defined as any currency that is stored, managed or exchanged on digital computer systems, digital currencies first fully came into being during the dot-com bubble in the 1990s.
What effect will central bank digital currencies have on global trade and markets? Read more here.
Cryptocurrency is the most well-known form of digital currency, but it’s not the only one. There has been a growing interest in Central bank digital currencies (CBDCs) for three reasons: a decline in the use of physical currency; a desire to stabilise and regulate the digital currency sector and; the rise in the number of cryptocurrency coins that could potentially undermine competition in the market. Proponents of CBDCs argue that they connect finance and security, a necessary combination when it comes to digital currency. There are currently 10 CBDCs worldwide, with 15 countries in the pilot stage of their own digital currencies. The Bank of Japan recently announced it would start trials on a digital Yen in early 2023, and the European Central Bank has been researching the possible introduction of a digital Euro since 2020. The most well-known CBDC is the People’s Bank of China’s digital Renminbi, which first began testing in April 2020.
Each form of digital currency has its unique qualities and affordances. No one person or institution is in charge with cryptocurrency, following a horizontal power structure. It aims to take power away from established financial institutions and the power the state has over finances. Cryptocurrency aims to take power away from established financial institutions and the power the state has over finances. CBDCs are on the other side of the spectrum: owned and controlled by the State through central banks, CBDCs follow the vertical power structure of traditional financial institutions. As Elise Thomas puts it: “a centrally controlled digital currency could enable a level of financial surveillance, economic power and societal control that was previously impossible.”
As CBDCs gain more traction and businesses work to ensure the stability, transparency and ethics of cryptocurrency, there is a strong case for digital currencies being part of the future. While they may not supplant traditional hard currency (nor are they meant to), digital currencies demonstrate that the relationship between finance, technology and innovation will continue to produce new ways of thinking about money.
RECOMMENDED READING:
1.Atlantic Council. (2022, November 08). Central Bank Digital Currency tracker. Retrieved December 1, 2022, from https://www.atlanticcouncil.org/cbdctracker/
2.Rodeck, D., & Adams, M. (2022, October 19). Digital currency: The Future of Your Money. Retrieved December 1, 2022, from https://www.forbes.com/advisor/investing/cryptocurrency/digital-currency/#:~:text=There%20are%20three%20types%20of,Bitcoin%20was%20the%20first%20cryptocurrency.
3.Siklos, P. L. (2021). CBDC: Governance Matters. In Central Bank Digital Currency and Governance: Fit for Purpose? (pp. 11–19). Centre for International Governance Innovation. http://www.jstor.org/stable/resrep31644.8
4.Thomas, E., Hoffman, S., Garnaut, J., Izenman, K., Johnson, M., Pascoe, A., & Ryan, F. (2020). Two sides of the digital-coin: freedom and control. In The flipside of China’s central bank digital currency (pp. 06–07). Australian Strategic Policy Institute. http://www.jstor.org/stable/resrep26895.6
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