AT.- When it comes to implementing new technologies, governments first think of the legal context before in the citizen, which later brings the problem to explain everyone how all this is going to work or if there is a sustainable platform for this tech to meet everyone’s needs.

But work is a keyword in this topic because the main concerns for the working class, nowadays and all over the World, are fair compensation for their work and inflation. Compensation depends on work contracts and labor conditions, but inflation is something that Central Banks are created to tackle.

Will a central bank, controlling a “government token”, solve this problem or make it worse? It’s fair to ask.

A few days ago, the Central Bank of -South- Korea announced a plan to test a CBDC, echoing a decision by the top European currency institution to do the same. As of now, 130 countries, representing 98 percent of global GDP, are actively exploring the concept of Central Bank Digital Currencies, which includes development, pilot testing, or even actual launches.

CBDCs are gaining global attention, and many countries are actively exploring their implementation to enhance financial systems and provide alternatives to traditional money, add that could be good for crypto.

Could. But our main concern if it that will help workers in these countries. Let’s begin with the basics.

 

Are CBDCs "tokens" issued by governments?

Although blockchain technologies enable cryptocurrencies to function we should not think of every single one as, for instance, Bitcoin or Ethereum. Each one has unique features to attend an use case. CBDCs are official digital currencies issued by central banks for efficient payments, while cryptocurrencies operate independently on public blockchains. There are some key distinct features that separate them and both approaches serve different purposes in the evolving landscape of digital finance.

Generally speaking, all the concerns about Issuing Authority, Networks, Governance, Privacy and Purpose will affect the value of any cryptocurrency, CBDCs included.

Although they are built on the same blockchain technology, while CBDCs are digital, they are not always tokenized on public blockchains like cryptocurrencies. CBDCs serve as official digital money, whereas tokens can represent a wide range of assets or functions.

Let’s make a list of key points:

CBDCs

·       CBDCs are official digital currencies issued by central banks. They are fully regulated and backed by the government.

·       CBDCs exist in digital form, but they are not necessarily tokenized on a blockchain. Instead, they often operate on authorized (private) blockchains or centralized systems.

·       The value of CBDCs is tied to the fiat currency (such as the US dollar, euro, or yen). They are essentially digital representations of traditional money.

·       CBDCs are used for efficient digital payments, financial inclusion, and other official purposes.

Tokens

·       Tokens, on the other hand, are a broader concept. They can represent various assets, rights, or utilities.

·       Cryptocurrencies (like Bitcoin or Ethereum) are a type of token. They operate on public blockchains and are decentralized.

·       Other types of tokens include security tokens (representing ownership in an asset), utility tokens (used for specific services or products), and non-fungible tokens (NFTs) (unique digital assets).

 

Why would CBDCs benefit the working class?

Labor force is the major economy sector spender and, somehow and losing its grip on this, money saver. CBDCs will provide some specific benefits besides making money distribution more traceable.

Central Bank Digital Currencies play a crucial role in the evolving landscape of monetary policy, they are not a silver bullet solution

Now, on what exactly workers will be having a better solution to their problems?

 

Payment Efficiency

CBDCs will bring secure and efficient means of digital payment and remittance. For workers, this means faster and more convenient transactions, whether they are receiving salaries, making purchases, or instantly sending money to family members, even overseas, much cheaper than the current banking methods.

Financial Inclusion

CBDCs can be particularly beneficial for workers who are currently unbanked or underbanked, and that’s a good and quick solution to benefit the traditionally forgotten society members in developing countries. By providing a digital alternative to cash, CBDCs make it easier for people to access financial services. This inclusion can empower workers in developing nations where traditional banking services are limited although, as we mentioned before, users would need devices or means to be able to make operations, a feature not yet topped by cash.

Reduced Transaction Costs

CBDCs can potentially reduce net transaction costs, benefiting lower-income households. Workers would not have to spend more on fees associated with traditional banking and remittance services, which is a hard toll to take in lower amount transactions.

Complement to Circulating Money

CBDCs would aid existing forms of money and financial services by opening new transaction bridges. Workers can seamlessly integrate CBDCs into their financial routines alongside other payment methods.

Deter Criminal Activity

CBDCs can enhance transparency and traceability in financial transactions, making it harder for illicit activities to occur. This benefits workers by ensuring a safer financial environment.

Buying large, CBDCs have the potential to improve financial access, streamline payments, and enhance security for workers and other players in the big economics, everywhere. However, it's essential to consider potential drawbacks, such as privacy concerns and integration complexities, as the adoption of CBDCs progresses.

 

Why Inflation happens?

Political and economic discourses all around the Globe blame inflation for cause number one for workers to demand better salaries. Why is it happening? Will it ever stop?

Inflation is a complex economic phenomenon that occurs when the general price level of goods and services in an economy rises over time and is influenced by a combination of demand, supply, monetary policies, and external factors. Central banks aim to manage inflation within a target range to maintain economic stability and promote sustainable growth

Will a central bank, controlling a “government token”, solve this problem or make it worse? It’s fair to ask.

There are many other factors, structural and psychological, but maybe the worst one is the currency depreciation. A weaker currency relative to other currencies can lead to higher import prices, contributing to inflation.

Let's delve into the main 3 key major canonical causes contributing to inflation:

 

Demand-Pull Inflation

Increased consumer demand for goods and services can lead to inflation when demand outpaces supply. Prices rise as businesses struggle to meet the increased demand, but also economic growth, which causes an increased consumer spending, and expansionary monetary policies on central banks can cause it.

 

Cost-Push Inflation

This type of inflation occurs due to rising production costs, like Higher wages. When labor unions negotiate higher wages, businesses pass on the increased costs to consumers. This also happens after a rise in raw material prices (such as oil, metals, or agricultural products), leading to higher production costs, or supply chain disruptions caused by natural disasters, geopolitical tensions, or other disruptions can affect production and supply, causing prices to rise.

 

Monetary Factors

When there’s excessive money supply, inflation strikes hard. When central banks print more money or keep interest rates too low, it can lead to inflation, and this is basically what economists fear if central banks use CBDCs as tools for increasing the money supply for political means.

Also, expansionary monetary policies like lowering interest rates encourages borrowing and spending, which can drive up demand and prices, as well as normal people’s expectations when they adjust their behavior (e.g., buying now rather than later), contributing to inflation.

 

But… Will CBDCs tackle Inflation?

While Central Bank Digital Currencies play a crucial role in the evolving landscape of monetary policy, they are not a silver bullet solution to stop inflation in countries, so that argument can be wiped out of their speeches.

CBDCs themselves are unlikely to cause inflation but they can provide central banks with more direct tools to execute monetary and fiscal policies that they currently lack like, for instance, real time information on how much money is moving within a national financial system.

As central banks implement policy rate hikes globally, the risk of synchronous and mutually-reinforcing recessions grows. Therefore, getting accurate information on inflation rates and the effects of policy rate changes on the real economy remains a challenge. Current methods of measuring inflation, including healthcare prices, rely on dated, incomplete, and sometimes incorrect data submitted by market participants. And for that, CBDCs can be a solution by becoming a source of useful data.

CBDCs themselves won't directly cause inflation, of course, but their implementation can enhance central banks' ability to manage monetary policy effectively and respond to economic challenges and bridge the legal gap for cryptocurrencies to be more widely used and accepted everywhere.
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