Why central banks are now taking digital currencies seriously – BRINK – conversations and insights into global business
The rising price of Bitcoin has raised the question of whether countries should set up their own digital currencies. A digital currency would be issued by central banks like banknotes, while cryptocurrencies rely on distributed ledgers like blockchain.
China already has started testing a digital yuan currency in several major cities, and the chairman of the Federal Reserve said so he will have a public dialogue about the idea of creating a digital central bank currency. Sergio Focardi is Professor of Finance at the Pôle Universitaire Léonard de Vinci in Paris.
FOCARDI: We currently have a two-tier banking system in most economies. There are commercial banks and a central bank. Commercial banks have accounts with customers while central banks only have accounts with commercial banks.
A central bank carries out a number of supervisory activities but also creates the base money, which is made up of banknotes. Bank accounts are debts that every bank has with its customers, payable in banknotes. But these days, the amount of money in bank accounts far exceeds any possible amount of banknotes, so the idea that a company could go to a bank and say, “Hey, I want my money back in banknotes” doesn’t make sense.
In addition, the public is increasingly turning away from the use of banknotes. When traveling to countries like Iceland or Norway, the use of banknotes is now really restricted for many different reasons.
Performs the same role as banknotes
EDGE: So would a central bank’s digital currency play the same role as a banknote?
FOCARDI: There are currently many projects for central banks digital money. Most of the major central banks are considering issuing some version of digital money. When you look at this Swedish bank’s E-Krona project, they have a means of payment that shares some of the same characteristics as banknotes, except that it is electronic. So it’s peer-to-peer, it’s anonymous, but it’s electronic.
Currently, the People’s Bank of China (PBOC) appears to be the first central bank ready to use digital money. You have already completed the testing phase and are ready to start the digital yuan. The digital yuan is not based on blockchain technology. The PBOC is careful not to over-advocate any particular technology.
From the user’s point of view, the digital yuan is like any other electronic wallet. However, the goal is to replace cash rather than bank money and therefore commercial banks will have a role to play in the distribution.
The European Union is still in the research phase. A report for 2020 outlines the future plan of the European Union. However, a pilot project has not yet started. The first goal is to make the European banking system more modern and efficient, and technologies have yet to be decided.
The creation of digital money in and of itself isn’t a huge source of risk. The real point is what governments want to do with the money.
Digital currency could be used for social benefits
The Federal Reserve is discussing plans to issue a digital dollar, but no test project has been identified. One element that could differentiate the digital dollar from other central bank digital currencies (CBDC) is its use as a welfare tool. With a digital dollar, the FED would be able to pay social benefits, including lump sums, to citizens.
It can be said that there are many projects and many possible solutions. Cryptocurrencies have piqued central banks’ interest in digital money, but the end result could be completely different from any current cryptocurrency.
EDGE: If this type of central bank digital currency were introduced, would it take the commercial banks off?
FOCARDI: That is a big question mark. The creation of digital money in and of itself isn’t a huge source of risk. The real point is what governments want to do with the money.
There are radical scenarios where the central bank issues digital currencies and has accounts with the public – you and me. But then the central banks would be in competition with the commercial banks, and the central banks are not equipped for millions of customers.
A less radical scenario is that they will essentially replace banknotes with digital money and that commercial banks will continue to operate as before. This is how people think today: Most central banks are trying to replace the use of banknotes with an electronic and easier-to-use, still anonymous system that does not, however, replace commercial banks.
Central banks keep an eye on Bitcoin
EDGE: What Would a Central Bank Digital Currency Do to Bitcoin? Do you think these cryptocurrencies will continue to exist?
FOCARDI: There are 150 alternative currencies today, but the only one that really goes on is Bitcoin – the others are marginal. I don’t really think governments will just let Bitcoin grow.
No government will want a power plant that can control financial transactions without being controlled. I don’t think that cryptocurrencies will become big players, at least in the foreseeable future, because it goes against the interests of governments.