Most central banks across the world are now scrambling to master the concept of digital currencies, a disruptive technology once they looked upon with regulatory scepticism.
Seeking to win a first-mover advantage in the race, China’s central bank is issuing 10mn yuan ($1.5mn) worth of digital currency to 50,000 randomly selected consumers in what some see as the country’s first public test of the digital yuan payment system.
The People’s Bank of China’s (PBoC) campaign comes as central banks worldwide race to issue digital currencies to modernise payments systems, as well as to fend off potential competition from privately issued cryptocurrencies.
Others are catching up, too.
Last Friday, a group of seven major central banks, including the US Federal Reserve set out how a digital currency might look, in a bid to catch up with China’s “trailblazing” and leapfrog private projects like Facebook’s Libra stablecoin.
European Central Bank president Christine Lagarde said on Monday the ECB is “very seriously” looking at the creation of a digital euro for the 19-nation currency club.
Bitcoin and such cryptocurrencies, which mask personal data from central actors, transact in an obscure domain with no legitimate regulatory oversight.
Central bank digital currencies (CBDC), however, are electronic versions of the legal tender, available either directly to consumers or via banks. They’re based on a technology called blockchain, used for verifying and recording transactions.
There are, of course, ifs and buts.
For sure, CBDCs could allow for faster and cheaper money transfers across borders, and improve access to legal tender in countries where cash supplies are dwindling.
A World Economic Forum paper has suggested that the new currencies could offer retail investors safer places to save, and could reduce the cost barriers that currently leave some 1.7bn people without banking services.
And the downside?
Depending on the model of a CBDC, central banks risk either cutting out commercial banks, a vital funding source for the real economy, or assuming the direct risks and complications of banking the masses.
Problems in managing a business that’s new to them could undermine the public trust that central banks count on to let them pursue occasionally unpopular actions like interest-rate hikes.
Some researchers have even expressed doubts about whether the current blockchain technology would be able to support a large volume of simultaneous transactions.
Central banks now have identified key criteria for issuing their own digital currencies in a report from the Bank of International Settlements.
Digital money will have to co-exist with cash and other forms of tender, do no harm to monetary and financial stability, and be very cheap or free to use. There should also be “an appropriate role for the private sector,” according to the report by the BIS, the ECB, and the Fed.
The Group of Twenty (G20) said in a report yesterday that it is working with the International Monetary Fund, the World Bank, and the BIS to formalise the use of CBDCs in banking systems. By the end of 2022, the G20 members, the IMF, the World Bank and the BIS will have completed regulatory frameworks for CBDC, the report said.
For sure, central banks are now increasingly paying attention to and experimenting in the field of digital currencies after Facebook proposed creating its own electronic means of payment, Libra.