United StatesChange Country

FX International Payments

National Digital Currencies as Payment Methods

By Mike Faden

As cryptocurrencies such as Bitcoin have taken off worldwide, countries large and small are seriously exploring the possibility of issuing their own national digital currencies. Central banks in major economies, including the U.S. and China, are researching the potential benefits, drawbacks, and mechanisms. However, only a handful of smaller countries have issued their own digital currencies to date — and some of those payment methods are limited in scope.

What is a Digital Currency?

 

There is a great deal of debate on the basics of how national digital currencies would work, as well as the benefits they might provide as a payment method. Experts point out that even today, currency exists largely in digital form as it is issued, loaned, and used in payments by central and private banks.1 A key difference is that a national digital currency does not have a tangible cash form such as banknotes or coins, although it could be converted to physical currency and vice versa.2

 

In a paper published in 2017 by the Hoover Institution think tank, economists discussed two possible ways that a national digital currency could work. One approach, which they considered analogous to physical cash, would be for a central bank to issue currency as digital tokens, which would then circulate as a payment method among businesses and individuals and might only rarely be redeposited back at the central bank. This approach would use a blockchain to verify and track transactions.3

 

In another approach, analogous to debit cards, businesses and individuals would hold accounts directly at the central bank or at supervised financial institutions. The payment method would be the central bank debiting the payer's account and crediting the payee's account.4 This differs from the current system, as operated in countries such as the U.S. and U.K., in which the central bank holds accounts for other financial institutions but not for individuals.5,6,7

 

As the Bank of England explains: "At the moment, we provide electronic accounts to banks and key financial institutions, but the public can only hold central bank money in physical form – as banknotes. If a central bank were to issue a digital currency everyone, including businesses, households and financial institutions other than banks could store value and make payments in electronic central bank money in addition to being able to pay with cash. While this may seem like a small change, it could have wide-ranging implications for monetary policy and financial stability."8

 

Why Sovereign Digital Currencies?

 

Countries are looking at issuing their own digital currencies for several reasons, experts say. One is to counter the rise of new cryptocurrencies – payment methods outside the country's control, such as Bitcoin.9,10,11 Some countries that are exploring national digital currencies, including China, have simultaneously restricted the creation and trading of other cryptocurrencies.12,13

 

National digital currencies could have a wide range of advantages and implications. If a national digital currency were issued by the central bank and were exchangeable with paper money, its value would be more stable as a payment method than cryptocurrencies like Bitcoin, experts say.14 Some suggest that introducing a digital currency would help speed the shift toward a cashless society; it would reduce cost and boost productivity, because businesses and individuals wouldn't have to manage cash or pay charges such as ATM fees.15 In addition, some experts suggest that if central banks issue accounts directly to individuals and shareholders, the move could reduce the need for retail banks.16,17

 

Experts also say that a national digital currency could help combat tax evasion and illegal economic activity.18 Replacing cash with digital money could also make it easier for central banks to lower interest rates below zero per cent, when desired, because "investors would have no cash to run to," according to one expert.19 In developing economies, digital currencies could broaden financial inclusion by making a digital payment method available to many more people.20

 

Digital Currencies as Payment Methods

 

Only a handful of small economies have decided to establish national digital currencies, and at least one of them even disputes the reports that it has done so. Ecuador, sometimes described as one of the first countries to establish a digital currency,21,22 says that in reality it has built a new payment system — not a digital currency.23 The country, which uses the U.S. dollar as its national currency, first proposed the new centrally run system in 2014; users can exchange physical dollars for digital money that is stored in an electronic wallet on a mobile phone. Some reports suggested the initiative could enable the country to reduce its reliance on the U.S. dollar.24

 

Estonia is planning to introduce a cryptocurrency with the working name "estcoin," according to a blog post by the head of the country's advanced "e-residency" digital initiative. However, estcoin could not become the official national digital currency, since Estonia is part of the EU and uses the euro as its currency, according to the blog post. Instead, the country is considering several variants of estcoin, which might be used to verify identity in blockchain-based transactions, or as a payment method that is exchangeable with euros.25

 

Major Economies Explore National Digital Currencies

 

Senior central bank officials in many of the worlds' biggest economies have said they are exploring national digital currencies – though most have also indicated they have no firm plan or timeline for introducing such a method of payment. They include the U.S., as several Federal Reserve officials indicated in 2017. "It's really very premature to be talking about the Federal Reserve offering digital currencies, but it is something we are thinking about," said New York Federal Reserve President William Dudley, according to the Wall Street Journal.26 Other officials suggested that a cautious approach is needed, noting concerns such as the potential for cyberattacks.27

 

China's central bank is researching a digital currency and has even designed and tested a prototype, according to reports.28,29 China is the world leader in mobile payment volume, and a digital currency could give the Chinese government greater oversight over billions of digital transactions, while reducing transaction costs. According to experts, this could increase financial inclusion and help reduce corruption.30 "Virtual currency is easier to trace, allowing the central bank to monitor its velocity and the whereabouts of the money and improve its monetary policies accordingly," according to the official heading research into the currency at the central bank.31

 

The Bank of England has been researching the possibility of launching its own digital currency since 2015, but says it has no current plans to do so.32,33 One report suggested this is due at least in part to concerns about the impact on traditional banks and the broader financial system. The Bank feared that consumers would choose to have an account at the central bank rather than at a retail bank, and was concerned about the potential financial turbulence.34

 

In Japan, a consortium of banks plans to launch a digital currency in time for the 2020 Tokyo Olympics, with support from the country's central bank, according to the Financial Times.35 One goal of the effort is reportedly to respond to competition from major mobile-payment services from Chinese and U.S. firms. The so-called "J-Coin" would be convertible with the Japanese yen on a one-to-one basis. In return for providing the service for free, the banks would benefit by collecting more data on consumer spending patterns, the Financial Times said.36

 

Other countries that are studying the possibility of a national digital currency include Canada, Australia, Sweden, Israel, and Russia.37,38,39,40,41

 

The

Takeaway:

The world's largest economies as well as smaller nations are exploring the possibility of issuing their own national digital currencies. However, they generally say they haven't yet decided whether to introduces such payment methods. Only a handful of smaller countries have so far issued their own forms of digital currencies.

Mike Faden - The Author

The Author

Mike Faden

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.

Sources

1. “Digital-Currency Fever May Spread to Federal Reserve,” Wall Street Journal; https://www.wsj.com/articles/digital-currency-fever-may-spread-to-federal-reserve-1512316801
2. Ibid.
3. Central Bank Digital Currency and the Future of Monetary Policy, Hoover Institution; https://www.hoover.org/sites/default/files/bordo-levin_bullets_for_hoover_may2017.pdf
4. Ibid.
5. “How is the Federal Reserve System structured?,” U.S. Federal Reserve; https://www.federalreserve.gov/faqs/about_12593.htm
6. “Does the Federal Reserve maintain accounts for individuals? Can individuals use such accounts to pay bills and get money?,” U.S. Federal Reserve; https://www.federalreserve.gov/faqs/does-the-federal-reserve-maintain-accounts-for-individuals-can-individuals-use-such-accounts-to-pay-bills-and-get-money.htm
7. “The consequences of allowing a cryptocurrency takeover, or trying to head one off,” Financial Times; https://ftalphaville.ft.com/2017/06/07/2189849/guest-post-the-consequences-of-allowing-a-cryptocurrency-takeover-or-trying-to-head-one-off/
8. “Central bank-issued digital currencies,” Bank of England; https://www.bankofengland.co.uk/research/digital-currencies
9. “The consequences of allowing a cryptocurrency takeover, or trying to head one off,” Financial Times; https://ftalphaville.ft.com/2017/06/07/2189849/guest-post-the-consequences-of-allowing-a-cryptocurrency-takeover-or-trying-to-head-one-off/
10. “Why bitcoin’s success could be its downfall,” Washington Post; https://www.washingtonpost.com/news/monkey-cage/wp/2017/12/11/why-bitcoins-success-could-be-its-downfall/?utm_term=.b93beb5c60e4
11. “Citigroup CEO: Bitcoin Threat Will Give Rise to State Cryptocurrencies,” Coindesk; https://www.coindesk.com/citigroup-ceo-bitcoin-threat-will-give-rise-to-state-cryptocurrencies/
12. “China Bitcoin Exchange to Stop Trading Virtual Currencies Amid Crackdown,” New York Times; https://www.nytimes.com/2017/09/14/business/china-bitcoin-exchange.html
13. “Russian Central Bank Issues New Warning Against Cryptocurrencies,” Coindesk; https://www.coindesk.com/russian-central-bank-issues-new-warning-against-cryptocurrencies/
14. Central Bank Digital Currency and the Future of Monetary Policy, Hoover Institution; https://www.hoover.org/sites/default/files/bordo-levin_bullets_for_hoover_may2017.pdf
15. Ibid.
16. “Bank halts crypto-currency plans over stability fears,” FT Adviser; https://www.ftadviser.com/investments/2018/01/04/bank-halts-crypto-currency-plans-over-stability-fears/
17. “The consequences of allowing a cryptocurrency takeover, or trying to head one off,” Financial Times; https://ftalphaville.ft.com/2017/06/07/2189849/guest-post-the-consequences-of-allowing-a-cryptocurrency-takeover-or-trying-to-head-one-off/
18. Central Bank Digital Currency and the Future of Monetary Policy, Hoover Institution; https://www.hoover.org/sites/default/files/bordo-levin_bullets_for_hoover_may2017.pdf
19. “The consequences of allowing a cryptocurrency takeover, or trying to head one off,” Financial Times; https://ftalphaville.ft.com/2017/06/07/2189849/guest-post-the-consequences-of-allowing-a-cryptocurrency-takeover-or-trying-to-head-one-off/
20. “Digital fiat currency will be deployed in developing countries first: Expert,” Chinadaily.com; http://www.chinadaily.com.cn/a/201710/14/WS5a0c01e3a31061a738406310.html
21. “Ecuador’s ‘digital currency’ explained, The Guardian; https://www.theguardian.com/global-development-professionals-network/2014/sep/11/ecuador-digital-currency-dollar
22. “Ecuador becomes the first country to roll out its own digital cash,” CNBC; https://www.cnbc.com/2015/02/06/ecuador-becomes-the-first-country-to-roll-out-its-own-digital-durrency.html
23. “10 things to know about Ecuador’s Electronic Payment System,” Ecuador U.S. Embassy; http://www.ecuador.org/blog/?p=4184
24. “Ecuador becomes the first country to roll out its own digital cash,” CNBC; https://www.cnbc.com/2015/02/06/ecuador-becomes-the-first-country-to-roll-out-its-own-digital-durrency.html
25. “We’re planning to launch estcoin — and that’s only the start,” Medium; https://medium.com/e-residency-blog/were-planning-to-launch-estcoin-and-that-s-only-the-start-310aba7f3790
26. “Digital-Currency Fever May Spread to Federal Reserve,” Wall Street Journal; https://www.wsj.com/articles/digital-currency-fever-may-spread-to-federal-reserve-1512316801
27. Ibid.
28. “China’s central bank is developing its own digital currency, even as it bans bitcoin and private cryptos,” South China Morning Post; http://www.scmp.com/business/companies/article/2118468/chinas-central-bank-studying-its-own-digital-currency-even-it
29. “China’s Central Bank Has Begun Cautiously Testing a Digital Currency,” MIT Technology Review; https://www.technologyreview.com/s/608088/chinas-central-bank-has-begun-cautiously-testing-a-digital-currency/
30. Ibid.
31. China’s central bank is developing its own digital currency, even as it bans bitcoin and private cryptos,” South China Morning Post; http://www.scmp.com/business/companies/article/2118468/chinas-central-bank-studying-its-own-digital-currency-even-it
32. “Central bank-issued digital currencies,” Bank of England; https://www.bankofengland.co.uk/research/digital-currencies
33. “Bank halts crypto-currency plans over stability fears,” FT Adviser; https://www.ftadviser.com/investments/2018/01/04/bank-halts-crypto-currency-plans-over-stability-fears/
34. Ibid.
35. “Japan’s big banks plan digital currency launch,” Financial Times; https://www.ft.com/content/ca0b3892-a201-11e7-9e4f-7f5e6a7c98a2
36. Ibid.
37. Central Bank Digital Currency: Motivations and Implications, Bank of Canada; https://www.bankofcanada.ca/wp-content/uploads/2017/11/sdp2017-16.pdf
38. “Israel's Answer to Bitcoin: A Digital Shekel That Could Replace Cash,” Haaretz; https://www.haaretz.com/israel-news/business/.premium-1.830879
39. “An eAUD?,” Reserve Bank of Australia; https://www.rba.gov.au/speeches/2017/sp-gov-2017-12-13.html
40. “The E-krona project – First interim report,” Sveriges Riksbank; http://www.riksbank.se/en/Financial-stability/Payments/Does-Sweden-need-the-e-krona/Reports/
41. “Putin considers ‘cryptorouble’ as Moscow seeks to evade sanctions,” Financial Times; https://www.ft.com/content/54d026d8-e4cc-11e7-97e2-916d4fbac0da

Related Articles

Central Banks are Considering Their Own Digital Currencies for Global Payments
Governments Seek Ways to Let Fintechs Offer New Banking and Online Payment Solutions
Outgoing Payment Solutions - Paying Suppliers In International Markets

Make International Payments

Existing FX International Payments customers log in here