Over the past decade or so cryptocurrencies, and their underlying technology, blockchain, have gained supporters and critics in equal measure. On the one hand, proponents of the decentralised nature of digital currencies have consistently maintained that cryptocurrencies will be the legal tender of the future – regulated entirely by the market, under the control of no single body, and safe from corruption or manipulation due to the strength of its underlying technology, blockchain. Conversely, opponents of cryptocurrencies, mainly governments, central banks, and traditional financial institutions have decried that the unregulated nature of cryptocurrencies, such as Bitcoin, poses a risk to the global monetary system, particularly due to its volatility.
However, despite criticisms levied from multiple sources, the growth of cryptocurrencies and crypto-assets has not been tempered. Slowly, these digital currencies are making their way into the mainstream, with regulatory bodies, initially against the adoption of these digital currencies, trying to develop methods of regulating the same. This has led to the formalisation of crypto-currency exchanges, with multiple governments requiring the exchanges to be registered, and the development of rules and regulations around the use of these assets to facilitate trade. On the other hand, governments and financial institutions are looking into blockchain technology, the decentralised database that acts as the foundation of cryptocurrencies, as a means through which they can solve real-life problems. In Kenya, for example, blockchain technology is being utilised to consolidate the land registry in a manner that ensures transparency and accuracy, whilst simultaneously maintaining integrity by preventing instances of corruption of the underlying data.
Seemingly in recognition of the adage, ‘If you can’t beat them, join them’, central banks have shifted their policy from the opposition of digital currencies to the adoption of the same into mainstream monetary systems. Specifically, central banks are considering the introduction of Central Bank Digital Currencies (CBDC), as a means through which cryptocurrencies may be integrated into mainstream monetary systems. To hear them tell it, CBDC’s promise the benefits of traditional cryptocurrencies, at least to the extent of their reliance on blockchain technology, whilst guarding against volatility that may endanger global financial systems. This is achieved by pegging the value of the CBDC’s to traditional currency, such as the USD or KES.
While CBDC’s and traditional cryptocurrencies share a common foundation, i.e. the use of blockchain technology, it is to be noted that that is as far as similarities go. Unlike traditional cryptocurrencies that are known to be fully decentralised, CBDC’s are managed, controlled and issued by central banks, and therefore carry more similarities to traditional currencies. This makes CBDC’s easy to incorporate into traditional monetary systems, and therefore regulate.
Karen Kandie – MD IDB Capital
