Central Banks around the world are exploring the opportunities of Central Bank Digital Currencies. Switzerland aims at becoming a frontrunner in the space, which would also have consequences for Liechtenstein’s currency system.

The Swiss Franc has been Liechtenstein’s official currency for more than 100 years. The small size of the country makes it difficult to set up its own currency, and the proximity and economic ties to Switzerland make it unnecessary.

Being tied to its neighbour’s currency does not come without its downsides, though. Liechtenstein is dependent on legal changes in Switzerland and on its economic development. Nevertheless, establishing a “Liechtenstein Franc” is not a viable option right now, says Hans Kuhn, from Zukunft.li. He believes the digitalization of central bank money should be the number one priority right now.

CBDCs don’t need to rely on the banking system

Central bank digital currencies (CBDC) have been a hot topic already for a few years now. Leading central banks worldwide are researching and have launched pilots to develop and establish such a digital currency system.

To clarify: A CBDC is not like Bitcoin. While Bitcoin is a free-floating cryptocurrency whose price is determined by supply and demand, a CBDC would be tied to the respective country’s fiat-currency reserve. A digital Swiss Franc could, for example, be tied 1:1 to the Swiss Franc, thus displaying the same value.

Contrary to electronic money, however, a CBDC does not necessarily have to flow via the banking system. Instead, the currency would be based on a blockchain-network. Thus, users would not need a bank account to access the money, but only a blockchain-based digital wallet.

The idea of a CBDC has also gained momentum during the COVID-crisis, as it would enable governments and central banks to send support checks much quicker than through the banking network. If, for example, businesses and citizens were registered on a blockchain-based registry, governments could send money, loans, or food stamps directly to their wallets.

Where CBDCs would also make a major difference is in automation. Machines can use digital currencies to transact with each other automatically, without the need for human involvement.

A digital Swiss Franc

The European Central Bank (ECB) has already started several research projects and pilots with national central banks and private sector banks to explore the possibilities and feasibility of a digital Euro. Likewise, the Swiss National Bank (SNB) has launched several pilots and cooperation.

Dirk Niepelt, professor for economics and director of the Gerzensee center of the Swiss National Bank, says, “Digital central bank money is the inevitable future.”

If it’s the inevitable future for Switzerland, the same holds true for Liechtenstein. Considering that both countries aim to be digital frontrunners, combined efforts to launch a widely used CBDC might be a good idea. Especially considering that other nations, for example, China, have already launched their own CBDC.

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