An e-yuan, a euro or a dollar? The world’s central banks are getting to grips with digital cash
The rise of central bank digital currency Large economies are exploring the options available. Image: iStock
The world’s largest central banks are stepping up efforts to issue digital cash to fend off emerging threats to traditional currency and make payments systems smoother.
In recent weeks, China’s central banks in the UK have stepped up efforts to test and research such technology, in part as potential rivals such as bitcoin move from financial margins to adoption. by major investors and companies.
Here’s what you need to know about Central Bank Digital Currencies (CBDCs):
What’s the idea?
CBDCs are the digital equivalent of banknotes and coins.
Like traditional cash, it will give holders a direct claim on the central bank and allow businesses and individuals to make electronic payments and transfers.
But access to central bank money beyond physical liquidity has so far been limited to financial institutions such as banks.
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Any large-scale adoption of CBDCs could have major economic and financial implications.
But don’t we already have digital money?
Yes, every time you use a debit or credit card, or a payment app, to buy groceries or do some dry cleaning, you are using some form of digital currency.
But this is created by commercial banks, on the basis of central bank money electronically credited to their accounts.
This form of digital cash is not as “risk free” as a CBDC. Deposits with commercial banks are generally only insured by governments up to a certain amount. If a bank goes bankrupt, you could lose your savings.
Why are central banks interested?
They fear losing control over the currency supply and payment systems to cryptocurrencies, whether it’s bitcoin or private efforts like the Facebook-backed Diem Project.
The spread of payment methods not supervised by a central or public body could weaken central banks’ hold on money supply and economic stability
The spread of forms of payment not supervised by a central or public body could weaken central banks’ hold on money supply and economic stability. Although distant, this threat has become more real amid massive adoption of cryptocurrencies.
As the use of physical cash declines, a CBDC would also ensure that the public has access to central bank money. They could also offer a new tool for central banks to transmit monetary policy and maintain the stability of economies.
What would a CBDC look like?
The scope and form of CBDCs will vary depending on central bank objectives and political issues.
A CBDC can take the form of a token stored on a mobile phone or a prepaid card. It can also exist on an account managed directly by the central bank or an intermediary bank.
There is nothing to say that it should use blockchain, the technology that powers cryptocurrencies.
The People’s Bank of China (PBOC), for example, has said its digital yuan will not be based on a blockchain. The Swedish e-krona, currently under testing, is, like bitcoin, blockchain-based.
Who is leading the way?
The PBOC aims to become the first major central bank to issue a CBDC. Its work, which is part of a process of internationalization of the yuan, is advanced. State banks are promoting the digital yuan ahead of a shopping festival on May 5.
Western central banks take longer.
The US Federal Reserve has said it will not rush any digital dollars. This year, however, will be important in getting things done, his head said.
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The European Central Bank plans to launch a digital euro within the next five years. The Bank of England stepped up its research last week, without making any commitments.
Small central banks are also active. Last year, the Bahamas became the first country to introduce a nationwide CBDC, and the Eastern Caribbean this month became the first central bank in the monetary union to issue digital cash.
And the risks?
Any massive migration to a CBDC could deprive commercial banks of a cheap and stable source of funding such as retail deposits.
In a crisis, CBDCs could see customers rushing to withdraw their deposits from commercial banks, preferring the security of liquidity guaranteed by the central bank. To counter this, most early designs envision a cap on CBDC holdings.
Central banks could redistribute the money they collect in CBDC deposits to lenders, but Swedish commercial bankers fear that the availability of mortgages or business loans will become dependent on the bank’s risk appetite central.
In emerging economies dependent on foreign currencies such as the dollar, easy-to-use CBDCs could also accelerate the decline of national sovereign currencies, erode the influence of monetary policy, and potentially destabilize local economies. – Reuters