October 29, 1929 is marked as the day the US stock market “crashed,” the first falling brick in the Great Depression. November 2022 will be looked on in the financial markets in commemoration of the multibillion-dollar failure of the FTX crypto and its FTX coin or token.
By definition, “A crypto token is a virtual currency token. It represents a tradable asset that resides on its own blockchain and allows the holder to use it for economic purposes.”
While fiat or “paper” money is backed by “the full faith and credit” of the issuing government—and what that full faith and credit actually means is difficult to know—we do know that a government is going to do whatever is necessary to make sure that everyone continues to use its currency.
“Crypto” is backed by the full faith and credit of the user (not the issuer) who believes—not actually “knows”—that he can covert that token to paper money at any time.
There have been many instances of a government’s money becoming worthless because of a loss of confidence in that government. But with cryptos, the loss of confidence in the issuer comes after the token become worthless.
While all the “cryptonauts” have been telling us that eventually your paper money also will be worthless, since Bitcoin came into existence in 2009, many other cryptocurrencies have failed after their launch. By May 2022, at least 2,421 cryptocurrencies have gone worthless, according to Coinopsy. That is a significantly large number of dead coins, even when compared to the 10,025 cryptocurrencies that have been in existence.
Nonetheless, governments are keenly interested in creating their own form of “Bitcoin,” which are called Central Bank Digital Currency (CBDC).
They are similar to other cryptos but are issued by a country’s central bank. More importantly, their value in local currency never changes as they are “pegged” to that currency.
In practice there is no value difference between paper money and a CBDC unit because they are totally interchangeable. It is just the next step in paperless money.
We use “digital money” all the time from paying with a bank debit card or using services such as GCash. It is important to note that “credit cards” are not digital cash. With a debit card or a GCash service, paper money has been deposited into the account previous to the transaction. A credit card “creates” new money when you use that type of payment.
CBDC is an easier way to spread “financial inclusion.” We know that a large percentage of Filipinos do not have a bank account. Even in the US, 5 percent of adults do not have a bank account. An additional 13 percent of US adults have bank accounts but use expensive alternative services like money orders, payday loans, and check cashing.
Investopedia: “The main goal of CBDCs is to provide businesses and consumers with privacy, transferability, convenience, accessibility, and financial security. CBDCs could also decrease the maintenance that a complex financial system requires and provide those who currently use alternative money transfer methods with lower-cost options.”
Banks and services like GCash usually charge a fee someplace along the transaction/transfer chain. Presumably this would end with wide acceptance and use of CBDCs.
The US Federal Reserve plans to launch a 12-week pilot program in partnership with several large commercial banks to test the feasibility of a central bank digital currency. India is working on developing a digital rupee and recently announced the second phase of testing.
The Bangko Sentral ng Pilipinas will launch a pilot program for its own CBDC. Project CBDCPh aims to bring hands-on knowledge of the key aspects of CBDC’s nature and its implication for the country’s financial system. It is only a matter of time.