By Mike Faden
Central banks are interested in digital currency for a variety of reasons, according to a June 2019 International Monetary Fund (IMF) policy paper and other sources. Those reasons include:
According to the Bank of England (BoE), a digital currency is an asset that only exists electronically, unlike traditional money such as banknotes.3 There’s no single agreed definition of how a central bank digital currency would work, but it is generally envisioned to be a new form of central bank money, denominated in an existing unit (such as a dollar or yen) that can be used for payments and to store value, according to the Bank for International Settlements (BIS).
There are many potential design choices, including whether a central bank digital currency is generally available to the public or restricted to specific institutions; whether it allows anonymous transactions; and whether it bears interest.4 Some initiatives use blockchain-based digital currencies. In some countries, central bank digital currency is being discussed together with a new payment system that supports it.
Several trends are driving the interest in national digital currencies, according to the IMF and other experts.
Decline of cash. The use of cash is declining in many countries as people increasingly adopt electronic payment methods such as credit cards and mobile payments.
Rise of private digital payments. Governments are eyeing the growth of fintech-developed payment networks, which are often closed systems in which many transactions take place outside the traditional banking system. As the IMF put it, a central bank digital currency “could … reduce the chances of a few large providers dominating the system.”5
International competition. In addition, central currencies face potential international competition from sources that include new cryptocurrencies such as Facebook’s Libra, some experts say. “Because digital money is naturally cross-border, it opens the way to new forms of currency competition, from Libra among others,” one former central banker wrote in a Financial Times opinion piece. “Some governments may try to use digital payment networks to internationalize their currencies, while others will face a risk of ‘digital dollarization’ through the penetration of foreign currencies in their domestic economy. This has the potential to significantly reshape the international monetary system.”6
Financial inclusion and economic development. Developing countries see central bank digital currency as a way to increase operational and cost efficiency, according to the IMF. Some countries with underdeveloped financial systems and many unbanked citizens see a national digital currency as a way to increase financial inclusion.7
Financial integrity and monitoring transactions. A national digital currency could give countries more visibility into and control over payments. According to the IMF, most central banks are considering a “non-anonymous” approach that allows authorities to trace transactions.
The People’s Bank of China (PBOC) may have been the first major central bank to start researching digital currencies back in 2014. In August 2019, PBOC officials and other experts said they are almost ready to launch a national central bank digital currency, according to reports.8,9
PBOC officials have indicated that they will operate a two-tier system in which the currency would be issued by the central bank but distributed by several of China’s large commercial banks and fintech-run mobile payment networks. Reports indicate the currency will be based at least in part on blockchain technology, with some design similarities to Facebook’s Libra, and able to handle very large transaction volumes.10,11
In March 2019, the Central Bank of the Bahamas said it had picked a technology provider to design and implement a national digital currency and payments system.12 The Bank said it expects the initiative, dubbed Project Sand Dollar, to provide all Bahamas residents with equal, expanded access to modernized digital payments capabilities. It also expects a reduction in cash transactions as a result. “The evolved Bahamian payments infrastructure should reduce service delivery costs, increase transactional efficiency and improve the overall level of financial inclusion in communities throughout the archipelago,” the Bank said.
Also in March 2019, The Eastern Caribbean Central Bank (ECCB) announced a contract with a fintech provider to conduct a blockchain-issued digital currency pilot within the Organization of Eastern Caribbean States, which is a group of Caribbean countries that use a common currency, the East Caribbean dollar (EC dollar). According to the ECCB, the pilot will involve a digital EC dollar distributed by licensed bank and non-bank institutions in the ECCU. The currency will be used for financial transactions between consumers and merchants using smart devices. For example, an individual in St Kitts and Nevis will be able to send currency from a smartphone to a friend in Grenada in seconds, at no cost.13
Several other countries are at various stages of conducting pilots and researching central bank digital currencies. Ukraine’s central bank has completed a pilot scheme for its national digital currency, according to reports, which also say officials have previously indicated their desire to reduce the country’s reliance on cash transactions.14 The government of Turkey included a central bank digital currency in its latest economic roadmap, published in 2019.15 In April 2018, Uruguay completed a six-month pilot of a digital currency, the e-Peso. The system enabled people to pay merchants and individuals via smartphones.
Sweden’s national bank, the Riksbank, says it has been exploring an “e-krona” digital currency since 2017, though no decisions have yet been taken on issuing the currency. The bank said it is commissioning a supplier to develop and test an e-krona platform in 2020. It noted that the use of cash is declining rapidly in Sweden, while electronic payments are expanding rapidly. “If the marginalization of cash continues, a digital krona ... could ensure that the general public still has access to a state-guaranteed means of payment,” according to the bank. “Alternatively, not to act in the face of current developments … will ultimately leave the general public entirely dependent on private payment solutions, which may make it more difficult for the Riksbank to promote a safe and efficient payment system.”16
Several countries are expanding firm plans for issuing national central bank digital currency or are actively exploring digital currency initiatives. Among the factors driving the developments are the decline of cash, the growth of private-sector digital payment methods, and the desire to boost financial inclusion and economic development.
Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations. Mike also is a principal at Content Marketing Partners.
1. Fintech: The Experience so Far, International Monetary Fund; https://www.imf.org/en/Publications/Policy-Papers/Issues/2019/06/27/Fintech-The-Experience-So-Far-47056
2. "Is China set to beat Facebook's Libra by launching its digital currency this autumn?," South China Morning Post; https://www.scmp.com/economy/china-economy/article/3025058/china-set-beat-facebooks-libra-launching-its-digital-currency
3. "Digital currencies," Bank of England; https://www.bankofengland.co.uk/research/digital-currencies
4. Central bank digital currencies, Bank for International Settlements; https://www.bis.org/cpmi/publ/d174.pdf
5. Fintech: The Experience so Far, International Monetary Fund; https://www.imf.org/en/Publications/Policy-Papers/Issues/2019/06/27/Fintech-The-Experience-So-Far-47056
6. "Central banks should issue digital currencies of their own," Financial Times; https://www.ft.com/content/ad1a6ae8-9be5-11e9-9c06-a4640c9feebb
7. Fintech: The Experience so Far, International Monetary Fund; https://www.imf.org/en/Publications/Policy-Papers/Issues/2019/06/27/Fintech-The-Experience-So-Far-47056
8. "China's Own Digital Currency Coming Soon, Central Bank Official Says," Caixin; https://www.caixinglobal.com/2019-08-12/chinas-own-digital-currency-coming-soon-central-bank-official-says-101450025.html
9. "Alibaba, Tencent, Five Others To Receive First Chinese Government Cryptocurrency," Forbes; https://www.forbes.com/sites/michaeldelcastillo/2019/08/27/alibaba-tencent-five-others-to-recieve-first-chinese-government-cryptocurrency/#4a9d41371a51
11. "China's National Crypto Similar to Libra, Central Bank Official Says," Cointelegraph; https://cointelegraph.com/news/chinas-national-crypto-similar-to-libra-central-bank-official-says
12. "Project Sand Dollar: The Central Bank Identifies Preferred Technology Solutions Provider for Bahamas Digital Currency," Central Bank of the Bahamas; https://www.centralbankbahamas.com/download/012640900.pdf
13. "ECCB to Issue World's First Blockchain-based Digital Currency," Eastern Caribbean Central Bank; https://www.eccb-centralbank.org/news/view/eccb-to-issue-worldas-first-blockchain-based-digital-currency
14. "Ukraine Completes Pilot Scheme for E-Hryvnia National Digital Currency," Cointelegraph; https://cointelegraph.com/news/ukraine-completes-pilot-scheme-for-e-hryvnia-national-digital-currency
15. "Turkey Puts Central Bank Digital Currency on New Economic Roadmap," Cointelegraph; https://cointelegraph.com/news/turkey-puts-central-bank-digital-currency-on-new-economic-roadmap
16. "E-krona," Sveriges Riksbank; https://www.riksbank.se/en-gb/payments--cash/e-krona/