For sure, most major global central banks - including the largest, the US Federal Reserve - are now toying with the idea of issuing digital currencies.
The Qatar Financial Centre (QFC) has brought to the fore one of the most trending economic developments currently – the emergence of central bank digital currency (CBDC).
Central banks across various jurisdictions are increasingly looking at CBDC, while carefully considering the potential challenges and implications, according to panellists at the recent World Alliance of International Financial Centers (WAIFC) annual meeting organised by the QFC and the Moscow International Financial Centre.
Where do the major players stand on CBDC?
Fed chair Jerome Powell has said it has made no decision yet on issuing a digital currency.
But the US central bank is an active participant in research - while conducting its own - into the prospect in partnership with other central banks and the Bank for International Settlements (BIS).
China’s digital yuan is probably the most advanced of the several CBDC initiatives.
Seeking to win a first-mover advantage in the race, China has concluded its largest pilot project to date for a central bank-backed digital yuan.
The Bank of Japan has said it aims to start early phase experiments next year on issuing a digital currency in order to be ready should demand for one rise quickly.
While the BoJ has reiterated it has no immediate plans to issue a digital currency, it is trying to keep up with peers.
European Central Bank president Christine Lagarde said last week the ECB is “very seriously” looking at the creation of a digital euro for the 19-nation currency club.
Recently, a group of seven major central banks including the Fed 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.
The Group of Twenty (G20) said in a recent report it is working with the International Monetary Fund, the World Bank, and the BIS to formalise the use of CBDC 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, CBDCs could allow for faster and cheaper money transfers across borders, and improve access to legal tender in countries where cash supplies are dwindling.
There are potential downsides also.
Depending on the model of 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.
Central banks now have identified key criteria for issuing their own digital currencies.
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 a report by the BIS, the ECB, and the Fed.
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