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When will central banks make the move to digital currencies?

Dondi Black | VP, Senior Director Market Engagement and Ideation, FIS

February 08, 2021

As cryptocurrencies like Bitcoin continue to soar in value, they threaten central banks’ ability to implement monetary policy and, as a result, many are now evaluating launching their own central bank digital currency (CBDC). In general, central banks from around the world have the economic, political and social motivation to consider launching CBDC.

What is a CBDC?

CBDC is also referred to as digital money, electronic money, electronic currency or cyber cash. Their defined characteristics are as a liability of the central bank and its electronic format. A CBDC is available as wholesale, limited to banks and other financial institutions. Or as a retail digital payment option, provided directly to general public. All cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies. They can be centralized transactions through a central server or decentralized through the use of decentralized ledger technology.

Different types of digital currency include B-Money that has a fix value redemption and is issued by banks. E-Money is also a fix value redemption product but if issued by private sector providers. I-Money is a variable value redemption products issues by investment funds as investment funds. Cryptocurrencies are also included in the competitive set.

According to American Express, central banks will issue currency as digital tokens, which then circulate as a payment method among businesses and individuals but might only rarely be redeposited back at the central bank. A CBDC is a form of currency that is available only in digital or electronic form, and not in physical form.

Economic, political and social motivations are driving the need for CBDC

Current monetary policy supports negative interest rates in an effort to keep the global economy moving. CBDC provides a more efficient implementation of this policy and keeps people from hoarding physical cash. Additionally, helicopter money (such as tax cuts and other stimulus initiatives) is another measure employed to expand the money supply in times of deflation. Helicopter money is seen as an alternative to quantitative easing. When it comes to payment systems, CBDC enhances transformation towards a cashless society by increasing number of electronic transactions. CBDC is also a very efficient approach for central banks as they reduce cost and boost productivity for cash management. CBDC’s can also help to remove low value coins from the economy, resulting in physical cash production savings. CBDC are considered safe and compete against private payments, elevating trust in a national payment system.

Politically, with the rising popularity of cryptocurrencies, central banks are interested in matching competitors with CBDC on the advantage of expected stability and reliability. Tracking for tax collection and financial crime might also be improved. The use of CBDC’s allows for better monitoring of financial activity making crimes such as tax evasion much more difficult. CBDC offers a higher level of control and traceability in comparison to private cryptocurrencies and cash.

Social motivations for CBDC includes easier transfer of money across borders, which will have many positive implications like enabling migrants, for example, to transfer money back to their home countries. CBDC will also broaden financial inclusion, allowing access cash and funds to more people around the world, particularly in emerging economies, which is an ongoing concern across countries.

Banking anytime, anywhere; no need for cash

The World Bank estimates that 2 billion people have no access to any financial services. Overall, only about 59 percent of men and 50 percent of women in developing countries have an account at a regulated financial institution. One of the reasons for the limited access to formal banking is non-availability of brick and mortar banks. Without physical banks, distribution and use of paper currency and coins is a big challenge that in time will make the use of CBDC more convenient and efficient. CBDC allows for an easier transfer of money across borders, which has many positive implications like providing migrants with the ability to easily transfer money to their home countries.

A slow and steady climb

As of now, there has been no successful CBDC implementation and the characteristics of CBDC are yet to be defined. But some banks and countries are getting close. The feasibility of CBDC continues to be evaluated. Of course there are legal and technical considerations representing additional hurdles. Decisions will also need to be made on how CBCD will interact with existing forms of money.

As with most new products and services banks are planning to launch, the process is methodical, and the actual implementation takes time. Currently, there are 191 central banks worldwide. Forty-one central banks are engaged in CBDC with about four in the development stage. The majority of participating central banks are focusing on both retail and wholesale CBDC. So, while many central banks are engaged, getting to the point of offering CBDC to customers is a bit of slow climb.