November 10, 2020
Earlier this week, Lebanon announced its plan to introduce a new digital currency in 2021. This feels natural to anyone following the rise of cryptocurrencies in recent years, starting with Bitcoin’s explosion in popularity in 2017. But Lebanon isn’t simply developing a new incarnation of Bitcoin as their currency. Like China, Sweden, the UK, and several other countries, Lebanon is working to create a central bank digital currency, or CBDC.
Unlike Bitcoin, Ethereum, and other cryptocurrencies, CBDCs are a form of digital currency fully backed by the country’s government and considered legal tender. Also unlike Bitcoin, the value of CBDCs are relatively stable. While the value of Bitcoin may fluctuate drastically over the period of an hour, day, or year, the value of a government-issued CBDC is fairly constant, much like how dollar bills have an almost constant value over time. This stability is key to any currency’s widespread use – if merchants, bankers, and investors cannot depend on the currency they receive to maintain its value, then they will use another more stable currency instead.
Building a CBDC is more complex than simply removing cash from circulation and switching to electronic banking as we know it today. Traditional banking systems ultimately rely on actual money being transferred, meaning that the number that appears in your bank account is a representation of the actual money you own. Under a completely digital currency, the number in your bank account is the actual money you own, and losing access to your bank account means losing that money forever.
CBDCs have distinct advantages over traditional currencies, particularly that precise analysis of the money flow can be utilized to combat money laundering and crime. More importantly for countries like Lebanon, a CBDC would boost trust in the governmental banking system. Lebanon has very little gold reserves, and instead of backing a traditional currency with gold, using a CBDC would enable the Lebanese government to sell the gold in foreign markets in the event of a monetary crisis.