Central banks eye digital cash to fend off crypto threat

Crypto

The world’s largest central banks, as well as a few of those smaller ones are toying with the idea of issuing electronic currencies.

These would allow holders to make payments through the internet and possibly even offline, competing with existing means of electronic payment such as digital wallets, online banks or cryptocurrencies.

Unlike these personal options, an official digital money could be endorsed by the central bank, making it “risk-free” like banknotes and coin.

While most jobs are still at an early period, they’ve switched into higher gear in the past year after Facebook Inc announced plans to create its own digital token and the COVID-19 pandemic boosted digital payments.

A group of seven central banks coordinated by the Bank for International Settlements set out on Friday the way the digital money could operate.

Here’s What we know so far:

WHAT IS A CENTRAL BANK DIGITAL CURRENCY?

A central bank digital currency (CBDC) is the digital equivalent of cash.

Like a banknote or coin, it gives its holder a direct claim on the central bank, bypassing commercial banks and supplying a greater level of safety as a central bank can never run from the money it issues.

Access to central bank funds outside physical cash has been restricted to financial institutions. Extending into the broader public could have significant economic and financial repercussions.

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Authorities say a CBDC would offer a fundamental way of payment for everybody at a time when cash use is dwindling. It would also offer a safer and possibly cheaper alternative to private solutions.

Their chief fear is losing control of the payment method if personal currencies like bitcoin or Facebook’s proposed Libra are broadly adopted.

This could make it more difficult for authorities to detect money-laundering and terrorism funding but also weaken central banks’ grip on the supply of money, which is one of the main avenues through which they steer the economy.

For many emerging countries, where a larger part of the population is unbanked, a CBDC could be a way to foster financial inclusion and extend the reach of the central bank’s monetary policy.

WHAT WOULD A DIGITAL CURRENCY LOOK LIKE?

Here’s where views differ.

Alternatively, it could exist in accounts managed by an intermediary like a bank, which would help authorities police it and potentially remunerate it with an interest rate.

While the idea of a CBDC was born in part as a response to cryptocurrencies, there’s nothing to say it should use blockchain, the distributed ledger technology (DLT) that powers these tokens.

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The People’s Bank of China said its digital yuan would not rely on blockchain.

WHICH CENTRAL BANKS ARE LEADING THE WAY?

China aims to become the first to issue a digital currency in its push to internationalise the yuan and reduce its dependence on the global dollar payment system.

Major state-run commercial banks are conducting large-scale internal testing of a digital wallet application, according to local media reports.

Some private companies, such as China’s largest ride-sharing app Didi Chuxing, are also participating in testing.

In Sweden, already the world’s least cash dependent economy, the Riksbank has also begun testing an e-krona.

The European Central Bank and the Bank of England have both launched consultations on the matter while the Bank of Japan and the Federal Reserve have so far taken a backseat.

WHAT ARE THE RISKS?

Central banks fear a massive migration to CBDC would hollow out commercial banks, depriving them of a cheap and stable source of funding like retail deposits.

In a crisis, this would make them vulnerable to a run on their coffers as clients would prefer the safety of an account guaranteed by the central bank.

For this reason, most designs envision a cap on how much each consumer would be allowed to hold in CBDC and, potentially, even a lower remuneration rate to reduce its attraction.

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WHO’S BEHIND THE TECH?

Some central banks have hired major consulting firms to develop pilot schemes. Sweden’s Riksbank, for instance, has partnered with Accenture Plc for tests on its e-krona.

But others, mostly in smaller countries, have tapped cryptocurrency and blockchain startups.

Lithuania turned to Gibraltar-based blockchain firm NEM to issue the first CBDC in the euro zone.

The Bahamas hired local tech firm NZIA to design and implement its “Sand Dollar” CBDC platform while the Marshall Islands turned to New York-based blockchain firm SFB Technologies.

The team at Platform Executive hope you have enjoyed this news article. Initial reporting via our official content partners at Thomson Reuters. Reporting by Francesco Canepa and Tom Wilson. Additional reporting by Alun John in Hong Kong, Leika Kihara in Tokyo, Bill Schomberg in London, Colm Fulton in Stockholm. Editing by Lisa Shumaker.

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