The development and adoption of central bank digital currencies (CBDCs) continue to be the focus of attention in many countries. Fintech expert Sergei Kondratenko explains that this tool provides countries with a unique opportunity to closely monitor financial flows and transactions. The Federal Reserve Bank of New York estimates that the use of CBDC in international currency transactions will reduce the time to less than 10 seconds. This promises high efficiency of financial transactions around the world. However, what will this innovation bring to the population and what are the forecasts for the development of global financial systems after the introduction of CBDC?
Sergei Kondratenko is a recognized specialist in a wide range of e-commerce services with experience for many years. Now, Sergei is the owner and leader of a group of companies engaged not only in different segments of e-commerce, but also successfully operating in different jurisdictions, represented on all continents of the world. The main goal is to drive new traffic, create and deliver an online experience that will endear users to the brand, and turn visitors into customers while maximizing the overall profitability of the online business.
CBDC and cryptocurrencies: fundamental differences and their significance for the future of finance - Sergei Kondratenko
The difference between CBDC and cryptocurrencies lies in several key aspects. According to Sergei Kondratenko, the digital national currency has functions similar to crypto. These include the use of blockchain technologies, ensuring high speed and reliability of operations. However, these two digital forms of payment are significantly different. The expert suggests considering the differences in the functionality of CBDC and cryptocurrency:
Users' data:
Cryptocurrencies adhere to the principles of anonymity or pseudonymity (as is the case with Bitcoin), where user privacy is ensured.
In the case of CBDC, priority is given to the identification and collection of personal data of users and their transactions.
Centralization and decentralization:
Cryptocurrencies generally operate in a decentralized environment, allowing users to contribute to the stability of the network.
CBDCs imply complete centralized control since decisions are made by government agencies, mainly the central bank.
Types of blockchains:
Cryptocurrencies such as Bitcoin and altcoin use open public blockchains where transactions are available to anyone.
CBDCs use closed private ledgers or private blockchains. This limits access to data to a specific group of people.
Dynamics of market value:
Cryptocurrency prices arise in a free market, under the influence of the interaction of supply and demand. They are influenced by various factors, such as the functional features of the cryptocurrency, the volume, and nature of its emission, as well as the availability of available credit resources.
CBDCs do not act as independent financial assets; their value is linked to traditional currency.
Purposes of use:
Cryptocurrencies can be used for various purposes - as capital accumulation, a means of making payments, and speculative transactions.
CBDCs are primarily intended as a means of payment with a stable and regulated exchange rate. This reduces speculation and its use as a store of value.
Sergei Kondratenko emphasizes that CBDC should not be considered as a potential threat to cryptocurrencies. He believes that in the near term, the most likely scenario is the coexistence of these two currencies.
Sergei Kondratenko: benefits of CBDC for the digital economy
Implementing a CBDC presents significant opportunities, but requires careful consideration of both the advantages and disadvantages. Sergei Kondratenko proposes to consider the advantages of CBDC, which will help to successfully develop the significance and functionality of national currencies.
Comparative stability and low volatility. With a CBDC, central banks' monetary policies can become more effective in achieving relative currency stability.
Efficiency and versatility. Thanks to the use of blockchain technologies, payments, and financial transactions will become instantaneous. This will increase security and lead to the stability of the national monetary system.
Direct interaction with the central bank. CBDC users have central bank guarantees, which reduce financial risks.
Maximum exclusion of illegal financial transactions. Strengthened control and monitoring of financial transactions will help quickly identify fraud. For this purpose, extended KYC/AML standards can be used.
Sergei Kondratenko: disadvantages and potential risks of CBDC
The promotion of CBDC among supporters is actively aimed at accelerating the adoption of the concept of a state digital currency by all participants in the economic process. In this case, Sergei Kondratenko suggests not rushing, but weighing all the pros and cons to provide possible scenarios for the development of the country’s financial system.
Here are the questionable factors that the implementation of CBDC entails:
Total control. The introduction of a CBDC could deprive its users of privacy, as well as pave the way for the introduction of a “social credit system”. A similar mechanism is already working in China and leads to limited financial opportunities for those people who deviate from the norms of behavior accepted in the state.
Regionalization. Each country is developing and operating its own CBDC. They are limited by geographic use, unlike bitcoins and altcoins. This creates the risk of regional restrictions on the use of CBDC in international transactions.
High inflation in the long term.
- In fact, the risk of inflation is characteristic of most fiat currencies, which include CBDCs. Moreover, in this case, traditional measures to combat inflation are often ineffective, especially during a recession and increased unemployment. If we take this factor into account, then cryptocurrencies are more profitable for long-term investors at this stage,- says Sergei Kondratenko.
CBDC development forecast from Sergei Kondratenko: which scenario is more acceptable?
The development of CBDC and its impact on the economy within the country and on a global scale may involve several strategic scenarios. Sergei Kondratenko offers an overview of them.
CBDCs will be available to everyone. In this case, CBDC will become the digital equivalent of cash. This model is likely to have the greatest impact on the economy and could be disruptive in this context:
Commercial banks will lose most of their fee income and they will be forced to look for new business models.
CBDCs from one country can penetrate the economies of other countries, replacing their national currencies as the main means of payment.
The issuing states will acquire full control over the monetary circulation of the country's residents.
The use of CBDC will be limited to financial institutions only. Such a model would not require radical changes. The functions of central and commercial banks will remain, but payment processes will become faster, safer, and more economical. Expert Sergei Kondratenko considers this scenario the most likely, since it does not entail destructive changes, but brings benefits to all participants.
Compromise model. For example, CBDC tokens may be available to retail users, but the right to carry out large transactions will be limited to financial institutions. In this case, the impact of CBDC on the economy will likely be minimal. Everything will function similarly to the current system. The exception will be that individuals will not be able to arbitrarily use significant amounts of CBDC.
Europe is actively considering CBDC opportunities. Trends speak for themselves.
For example, some countries in South-Eastern Europe have some restrictions and limitation on the use of cash. It is an indicator of digitalisation and the course toward the CBDC. In Slovenia, traders can accept cash payments up to a maximum of €5,000. Cash payments of more than 10,000 leva (approximately 5,100 Euros) are prohibited in Bulgaria. Romania has set a daily cash transaction limit of 10,000 lei (€2,000) for individuals from 2023.
According to Sergei Kondratenko, the implementation of CBDC requires a balance between innovation, benefits for all users, and taking into account potential negative consequences. Only an alternative in this case will help ensure the stability and efficiency of a digital national currency.