Central Banks and the adventure of (their own) digital currency

Tempo de leitura:

Text by Pyr Marcondes, Senior Partner at Pipeline Capital Tech.

You may have already read it around, but it’s worth a catadão here.

It is estimated that at least 100 central banks in the world are researching and seeking to structure, at this very moment, their particular version of a digital national currency.

Internationally, these currencies are called CDBC, or Central Bank Digital Currency. The Central Bank of Brazil announced, in May last year, that it is analyzing its hypotheses. Last week, after a long quiet period, the Federal Reserve, the US central bank, issued a long document on the subject. Nothing definitive, but it opened up a discussion on the subject in the largest and most influential banking system in the world. And he is that because the US dollar is used for approximately 90% of all monetary transactions in the world. The giant moved.

And how important is this whole discussion to you and me? And for our economy? And for our business? Total.

This is yet another piece of the most relevant transforming evolution of the concept of money in the world since the concept of money has existed.

By the way, since I touched on the subject, do you know what money is? Hmm… you really know?

So for you, I’ll be repetitive.

Money is a means of exchange between values and goods, which mediates and replaces barter. Bartering is the direct exchange of things for things. Money translates these exchanges into monetary value.

Above all, money is a socially accepted standard unit by which things are priced.

Deep down, between us, money is just a financial fiction. A combination of commercial and economic character among men. We agree that money is worth something that we have or that someone else has, and it can facilitate the exchange of these “somethings”.

And here we bridge the history of central banks. Money is one thing, Currency is another. The main difference between Money and Currency is that money is entirely numerical, that is, it is only intangible. You can’t touch or smell it. As for Currency, you take it, smell it and keep it in your pocket or wallet. Or even at the bank.

And we got to the banks. But before continuing, you need to understand what fiduciary is.

Fiduciary is what I talked about above. A combo. In this case, something that has value and that depends on the trust attributed and granted to it. And recognized. It’s crazy, but it’s about ethics and trust that everything we know about coins is based on.

Fiat money is a government-issued currency that is not backed by a physical commodity, but by the stability of the issuing government.

Okay, now you, who certainly already knew the difference between Money and Currency, and what fiduciary is, are ready to understand the importance of digital currencies. And it’s pretty simple. The above concepts are much more complex.

Digital currencies are basically a virtual version of a country’s currency, used for everything that physical money is. Only in the world of bits and internet connections and the technological platforms that gravitate around it.

You might be thinking that most financial transactions are now done digitally. True. Economies and Capital are, today, mostly digital. But until now, the only way for central banks to issue circulating money is through notes and coins in kind. Ultimately printed painted paper.

With the creation of CBDCs, it will also be possible to issue coins in virtual format, putting money into circulation that, in reality, has never been, and never will be, printed.

And this is a revolution.

As you are an intelligent person, you must already be thinking like this: wait a minute, but this already exists and is called cryptocurrency. Only not. This is not cryptocurrency.

A digital currency issued by a Central Bank is regulated and managed by the country’s financial authority in a centralized way (as the bank’s name already reveals). Central Banks regulate a nation’s financial system.

Cryptocurrencies, on the other hand, live their private lives outside of this control. They are issued and managed by an essentially decentralized system, inscribed on the blockchain. Who regulates this market is the market itself and its players. And the transactions themselves.

Another important thing is that digital currencies, unlike cryptocurrencies, which are primarily considered financial assets, can be used to buy bread at the bakery.

We’re still going to pay the bakery’s portuga with cryptocurrencies one day, but that day is still a little far away. Digital currencies will work as they do today, for example, debit cards. And good.

By the way, this is exactly the main reason why Central Banks are now concerned with this issue. The economy of private instances is starting to control part of the national and global financial systems, creating something like a parallel virtual economy and either the Central Banks start to play this game, or, like everything else in the digital world, they will be disintermediated and disrupted. Dust from the past. They lose power. And no Central Bank evidently wants that.

And why don’t Central Banks resolve this issue soon and launch their digital currencies? Because they are heavy, straight institutions, full of strings and financial and political compliances.

The Central Bank of the United Kingdom summarizes, in a document issued on the subject, the fears of these institutions. One of the main ones is that Central Banks need to be concerned about the private banking system, which is starting to play the cryptocurrency game now, but feels threatened by all this movement that shifts centuries-old control of the financial market from its hands. Quickly translating here, the English say it like this:

“What is the precise threat posed by privately issued digital currencies? What could a CBDC do to offset any threat and what is its regulatory role? How can a CBDC be a competitive payments option without causing a level of disintermediation in the banking sector, which would have consequences for credit allocation and financial stability? How can a CBDC ensure strong privacy safeguards while meeting financial compliance rules? What are the main international and national security risks that arise from a CBDC, and how can they be managed?”

And so on. You understood.

CDBCs, everything indicates, will come, one way or another. And money, as we knew it, will gain, with that, in an even more marked way than it already experiences today, a new nature and a new format. Currency virtualization is about to happen and be 100% of the money we use.

Follow and you will see.

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