FINTECH FRIDAYS

6th August 2021

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What Is a Central Bank Digital Currency (CBDC)?

As the name suggests, CBDC represents a nation’s currency in digital form. Unlike decentralized cryptocurrency projects like Bitcoin, CBDC is centralized; it is issued and regulated by a country’s monetary authority. As seen in the map above, several governments are conducting research into the viability of issuing their own CBDCs, with pilot programs running in China - eCNY, Canada - Jasper, France - France CBDC, South Africa - Khokha, etc. However, no country has officially launched a full scale nationwide CBDC.

 

To add to the growing list of countries conducting pilots on CBDCs, the Central Bank of Venezuela officially announced on 6th August 2021, Friday, that it will launch its central bank digital currency (CBDC) in October this year.

Since 2016, Venezuela has suffered from hyperinflation partly caused by the controversial leadership of President Nicolas Maduro with his money-printing policy, despite the country's rich natural resources, sitting at first place as the nation with the largest oil reserves in the world.

 

It is reported that in 2020, the annual inflation rate is estimated to be approximately 2,300%. Forms of aid and assistance are needed to address the country’s ongoing economic crisis. Due to the devaluation of the Venezuelan bolivar, Venezuela, which has recorded a high inflation rate, has also seen its citizens turn to US dollars and Bitcoin as a hedge.

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 Cryptocurrency activity has always been a widespread phenomenon in Venezuela. The government of Venezuela, led by Nicolas Maduro, issued its cryptocurrency Petro in Feb 2018. According to the government, Petro is backed by oil and mineral reserves to support the depreciating Venezuelan bolivar currency while circumventing US sanctions.

 

To solve the high inflation of Venezuela's currency, the Central Bank of Venezuela stated that the issued CBDC would remove six zeros as a readjustment and use the Short Messaging Service (SMS) exchange system to facilitate widespread public use. Venezuela’s government reaffirmed that the revaluation of its CBDC will not affect the value of the country’s legal currency, the Bolivar. "The bolivar will not be worth any more or any less, in order to facilitate its use, it is being taken to a simpler monetary scale."

 

In addition to Venezuela's statement to launch its central digital currency this year, South African country Lebanon also revealed that its central bank (also known as Banque du Liban) might launch a digital currency in 2021, according to the Governor of The Central Bank of Lebanon Riad Salameh.

 

As time progresses, more countries are embracing the digitalization of money, some being more cautious than others. Prudent nations are launching pilot programs and collecting important feedback and information that would go into consideration as to whether or not CBDC’s will become the future of money.

References:

https://cbdctracker.org/

https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp

https://blockchain.news/news/venezuela-to-launch-its-central-bank-digital-currency-october

The views expressed within this article are those of the authors and do not represent the views of the Finance Student's Association. All images and references in this article are for fair and educational purposes only. The content in this article is not intended as legal, financial or investment advice and should not be construed or relied on as such.