Paper currencies have no intrinsic value. They have value because they are issued by the government, specifically the central bank; they have value because the government says so. A government-issued currency is fiat money.

The US dollar, UK’s pound sterling, euro, Japanese yen, Korean won, China’s renminbi and the Philippine peso are fiat currencies as these are not backed by any commodity such as gold.

Paper currencies, however, are prone to wear and tear.

In 2020, the talks about central bank digital currency (CBDC) became loud amid the Covid-19 pandemic, during which online transactions saw a meteoric rise in the Philippines and other parts of the globe. The boom of cryptocurrencies led by Bitcoin also made central banks consider issuing CBDCs as a way to counter crypto.

A CBDC has attributes of a fiat currency: It is a unit of account, a medium of exchange and it has a store value. The only difference is that a CBDC is digital—its holder cannot hold, touch or feel it. One cannot convert it to cash; it remains on the digital network.

Former Reserve Bank of India director D. Subbarao told CNBC that the “standard concerns” about CBDCs are that “they could become vehicles for illegal activities” like money laundering, drug trafficking, tax evasion, among others.

The other concern about CBDC is the privacy of the transaction using it—”transactions with CBDC will be traceable; it will even have a trail behind it,” Subbarao said.

Advantages of CBDCs include faster payments, less expensive international transfers, round-the-clock access, support for the unbanked and underbanked (individuals who do not have bank accounts), and more efficient government payments, Forbes reported.

China, for its part, has continued to test its CBDC, its digital yuan (unit of account). Its government has recently launched a smartphone app, e-CNY, for payments and transfers using the digital yuan, and the app is already available in 12 cities and regions that include Beijing and Zhangjiakou, the host cities of the Winter Olympics in February, Nikkei Asia reported.

The app was first launched in October 2020. And the digital yuan can be used in transactions with no Internet connection.

People’s Bank of China has been developing the digital yuan since 2014. As of Nov. 2021, the Chinese central bank said 140 million individual and 10 million corporate digital yuan wallets had been created. The East Asian country and the second largest economy in the world has no date yet of its full rollout of the digital yuan.

PBOC deputy governor Fan Yifei said in 2020 that there is a “pressing need to digitalize cash and coin” as producing and storing these currently is expensive, CNBC reported.

Criticisms were hurled against the digital currency efforts of the authoritarian government in Beijing. A Bloomberg report states that it “may be easier” for the Chinese government to “retaliate against anyone who rebuffs Beijing on sensitive issues like Taiwan, Xinjiang and Hong Kong” as it has the “ability to monitor transactions involving the digital currency.”

In the Philippines, Bangko Sentral ng Pilipinas (BSP) Gov. Benjamin Diokno said last year that the central bank is “developing our capacity to adopt” CBDC.

“But we are not in a hurry... at the moment,” Diokno said.

However, the BSP has intensified efforts to push Filipinos from being cash-heavy to cash-lite, digital-heavy by promoting digital transactions. Diokno said in a recent report that he believes digitalization promotes greater financial inclusion, and the faster payment processes speed up capital turnaround.

Digital payments accounted for 20 percent of total financial transactions in the country at the end of 2020, far from one percent in 2021.

The BSP, Diokno said, has put in place enabling regulations for financial digitalization because the “income and growth opportunities” for Filipinos will be unleashed with digitalization.

Digitalization is the way to go, and CBDCs are definitely a part of it. A digital peso is not a far-fetched possibility.