David Andolfatto on Central Bank Digital Currencies (CBDC)
After Facebook shocked policymakers with its plan to launch a digital currency last year, central banks have begun discussing how they can create their own virtual money..
Now they have developed a rough diagram of the operation of such a system. On Friday, the Bank for International Settlements (BIS) and seven central banks, including the Federal Reserve, the European Central Bank and the Bank of England, released a report outlining some of the key requirements for central bank digital currencies (CBDCs).
Among the central banks’ recommendations were that CBDCs complement but do not replace cash and other forms of legal tender, and that they support, rather than harm, monetary and financial stability. They stated that digital currencies should also be safe, should be as cheap as possible to use and «play an appropriate role for the private sector».
The CBDC report comes from various central banks around the world considering their own digital currencies. The blockchain technology behind cryptocurrencies like Bitcoin has been touted as a potential solution. However, cryptocurrencies have come under close scrutiny by central banks, many of which are concerned that they are opening doors for illegal activities such as money laundering..
In China, a country where digital wallets like Alipay and WeChat Pay have become widespread, the central bank is already partnering with several private sector companies to try out the e-currency that it has been working on for years. Meanwhile, Sweden’s central bank is working with consulting firm Accenture on a pilot project for its proposed currency. «e-krona» (electron crown).
«Development that provides these features can foster more sustainable, efficient, inclusive and innovative payments», – said Benoit coeur (Benoit Coeure), former European Central Bank employee who now leads the BIS innovation sector.
«While there may not be a universal CBDC due to national priorities and circumstances, our report is a springboard for the further development of effective CBDCs.» – he added.
It is worth emphasizing that these central banks are still undecided on whether they and other institutions should issue digital currencies. They are still exploring the possibility of using such virtual currencies. Proponents of digital currencies say they can improve financial inclusion, especially for those people who don’t have access to a bank account. But there are concerns that this may not be considered by commercial banks..
The central bank’s work on digital currencies appears to have been intense last year after Facebook unveiled its own version, libra, which is backed by a coalition of companies including Uber and Spotify. The problematic project was met with harsh reactions from regulators, as well as the departure of such well-known project sponsors as Mastercard and Visa..
The group overseeing the initiative, called the Libra Association, has since scaled back its approach, opting for multi-currency pegged cryptocurrencies instead of the previously proposed single digital coin backed by multiple currencies..