Why Central Banks Have Taken Digital Money Seriously

Silver is heading for its greatest reinvention in centuries. Modern technology and even the coronavirus pandemic are pushing consumers away from cash, and with alternative concepts like cryptocurrencies taking hold, central banks are moving quickly to ensure they don’t take delay. The goal is a payment system that is safer, more resilient and less expensive than current options – or alternatives pioneered by the private sector.

1. What would CBDCs look like?

It’s not that different, at least on the surface, from keeping e-money in a bank account and using cards, smartphones, or apps to send that money out into the world. The main difference is that money provided by a central bank – like cash – is generally considered a risk-free asset. For example, a dollar bill issued by the US Federal Reserve is always worth $1. A dollar in a commercial bank account, although in theory convertible into paper money on demand, is subject to the solvency and liquidity risks of that bank, which means that consumers cannot always access it and may lose money if a bank fails. CBDCs, like banknotes and coins, would be the direct responsibility of the central bank, carrying its guarantee.

Central banks are experimenting on two main routes: wholesale and retail. In retail projects, customers could open accounts with a central bank using CBDCs, an approach that could help those who currently lack access to banking services. In wholesale projects, banks and other institutions would have access to CBDCs, but consumers would not.

3. How would payments improve?

Under the current system, commercial banks clear transactions with each other in a process that involves delays that open up credit risk for the time it takes for the transaction to be completed. Settling payments using CBDCs could eliminate this lag. Cross-border transactions face additional hurdles; international settlements using CBDCs could be much faster and cheaper.

4. Are they cryptocurrencies?

No. Even when the value of Bitcoin increased, its use in payment transactions was still limited. The cryptocurrency movement – ​​where groups of private citizens are developing protocols for their own versions of money – was also a revolt against centralized financial authority, as central banks and CBDCs embody it. . A possible overlap is the blockchain technology pioneered by Bitcoin, which functions as a publicly distributed ledger of transactions. Some countries are experimenting with blockchain, though experts doubt that in its current form the technology can handle the volume a CBDC could generate. Crypto development central banks are most concerned about “stablecoins,” which peg their value to an existing currency or asset. Plans announced by the Facebook operator in 2019 for a stablecoin (first called Libra, then Diem, now dead) rattled central banks and accelerated work on CBDCs.

5. What are the potential drawbacks?

Denmark and some other countries have ruled out the retail model for CBDCs because traditional banks that support economies by providing loans could be undermined if depositors switch to central bank accounts en masse. Privacy advocates worry about a loss of anonymity and the potential for government surveillance.

The International Monetary Fund indicates that about 100 countries are in various stages of exploration. Nigeria’s eNaira went into circulation at the end of 2021. India surprised the payments world by announcing that its central bank would issue a digital rupee this fiscal year. In China, some 140 million consumers used the digital yuan during its trials. Some of the Eastern Caribbean islands that share a central bank have launched their own digital currency, DCash. Its use was extended to Saint Vincent and the Grenadines in 2021 after a volcano erupted; deployment was seen as a key part of recovery efforts.

The Fed was lukewarm on the idea. He published an article outlining the benefits, but officials say there will be no “Fedcoin” without congressional action. Other central banks say they are building technical capacity but see no urgent need to act.

8. Is there a precedent for this?

Not quite, although there are parallels. For centuries, it was common for transactions to be conducted in banknotes and coins issued by individuals, despite the endless headaches caused by fluctuating values. In the late 1800s, many governments seeking greater monetary control gave themselves a monopoly on issuing currency. Today, with the rise of crypto and the decline of cash, central banks are once again seeing the need to get creative.

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