The trend of crypto assets (virtual currency) to establish itself as a powerful payment method is accelerating. Under these circumstances, there is increasing pressure on major central banks to advance the Central Bank Digital Currency (CBDC) issuance plan and prevent the traditional monetary system from being threatened by the private sector.
Bitcoin, the largest cryptocurrency, used to sit quietly in the corner of financial transactions, but is now actively accepting large investors, businesses, and even some municipalities. When electric vehicle (EV) maker Tesla announced a $ 1.5 billion investments in Bitcoin, Bitcoin prices hit a record high and approached the $ 50,000 mark. Facebook-led digital currency Libra (formerly Libra) is aiming to be issued later this year.
The central banks of the seven major countries (G7) summarized the basic functions required of digital currencies in October last year, but since then, efforts on this issue have not made much progress. There was no mention of digital currencies in a statement from the G7 Finance Ministers’ meeting last week.
The latest situation regarding central bank digital currencies is as follows.
What is Central Bank Digital Currency?
Literally, it is money issued in electronic form. Like traditional banknotes and coins, owners can claim rights directly from the central bank without going through a commercial bank. The central bank digital currency is also backed by the credit of the government and the central bank, so it is still “risk-free” and can be used by owners for online payments. Until now, transactions with central banks other than real money have been limited to financial institutions, but broadening the scope is expected to have a significant impact on the real economy and the financial system.
Why the central bank thinks it needs a central bank digital currency
The central bank fears that the power to control the world’s payment systems will be lost by cryptocurrencies, which are generally not controlled by central institutions, or by private companies such as Facebook in the case of Diem.
In such a situation, the ability to adjust the money supply, which is the main means of spreading the effects of monetary policy on the real economy, may weaken. In fact, the rapid expansion of the use of various digital currencies in the economy makes these scenarios even more realistic.
BNY Mellon, which manages the assets of major institutional investors, and MasterCard, a credit card, announced last week that they will provide support services for crypto asset transactions. The city of Miami, Florida, is moving to allow Bitcoin to be used for payroll, tax payments, and commission payments.
As the use of real money decreases, central bank digital currencies will become a more secure digital payment method to replace private crypto assets.
What will it look like?
The idea has not been summarized yet. One idea is to make offline transactions easier by using a token format that is stored on a smartphone or prepaid card. Another idea is to put it in an account managed by an intermediary such as a bank so that it can be used to supervise the authorities and earn interest.
Such a concept was born as a countermeasure for crypto assets, but it is not necessarily linked to the block chain technology that supports crypto assets. The digital yuan, which the People’s Bank of China (Central Bank) aims to issue, does not rely on block chain.
The leading central bank
The People’s Bank of China aims to be the first major central bank to officially issue a central bank digital currency. It is positioned as part of the basic policy of promoting the internationalization of the renminbi and reducing reliance on payment systems in which the dollar plays a leading role. According to local media, Chinese state-owned banks have already piloted digital wallet apps. E-commerce company JD.com announced in December last year that it would accept the digital yuan for the first time on China’s online platform.
The European Central Bank (ECB) and the Bank of England (BOE) have released a public consultation document on the Central Bank Digital Currency, but ECB Governor Christine Lagarde was still years away from actually issuing the “digital euro” last month. Said that it would be. The Bank of Japan and the Federal Reserve Board (FRB) belong to the latecomers.
The central bank of Sweden has begun a demonstration experiment of “e-corona”, and the central bank of Canada is also accelerating the work toward issuance.
Small countries other than the major ones are also moving forward. The Bahamas introduced the Central Bank Digital Currency nationwide for the first time in the world last year.
The risks involved
Central banks are worried about individuals who are becoming more and more hollowed out of commercial banks in the event of a major transition from commodity money to central bank digital currencies, making them a cheap and stable source of funding. It is a development to lose deposits. In the event of a financial crisis, as customers want to place funds in accounts guaranteed by the central bank for security reasons, it is easy for funds to flow out of banks.
For that reason, most central bank digital currency institutional designs envision capping the amount of money an individual consumer can hold. Interest rates may also be set lower in the sense that they weaken the desire to retain interest.