Central Banks Worldwide Explore Rolling Out Digital Currency

By Mariliana Fotopoulou Friday, October 9, 2020

The world’s largest central banks are exploring the idea of implementing digital cash in a bid to ward off the crypto threat. Cryptocurrencies would let consumers conduct payments online, as well as potentially offline, and would become a rival to the existing electronic payment methods like digital wallets, online banks, or cryptocurrencies.

How Does It Work?

An official digital currency would be supported by the central bank and would be risk-free, just like cash or coins.The majority of digital cash projects in the world are still in their early phases, however, central banks have started accelerating the process since Facebook said it plans to roll out its own virtual token.

Coordinated by the Bank for International Settlements (BIS), seven different central banks set out how a central bank digital currency (CBDC) could operate. In layman’s terms, a CBDC is the electronic version of cash.

Just like cash and coin, a holder of CBDC has a direct claim on the central bank, thereby evading commercial banks. Also, a CBDC offers higher security because its issuer, a central bank, can not run out of the currency it puts out.

Until now, central bank money other than physical cash could be accessed only by financial institutions. Extending that access to the public could result in massive economic and financial consequences.

Governments around the world say that digital cash would be a basic payment method for everyone, during periods when cash use is diminishing. Furthermore, it is a safer and probably cheaper means of payment than private solutions like crypto or online banks.

A CBDC would also greatly help emerging countries, where the majority of the population is unbanked. While it’s still unclear what exact form a CBDC would take, it could be a token stored on a physical device such as a prepaid card or a smartphone, making it easier to send it offline and privately.

Another choice is through accounts controlled by an intermediary like a commercial bank, which would help authorities protect it and maybe even compensate for it through interest rates.

Who Is Leading the Race?

It appears that China’s central bank will become the first one to launch a CBDC, while Sweden’s Riksbank has already started testing its e-krona. The European Central Bank (ECB) and the Bank of England (BoE) have also begun consultations on the subject, while the Bank of Japan (BoJ) and the Federal Reserve are less involved so far.

Japan currently has no plans to roll out a CBDC but will conduct deep research on the matter, said the Japanese government’s top spokesperson on Friday.

“At present, we don’t have any specific plans to issue CBDCs. But this is something we obviously need to consider in a world of digitali[z]ation,” Chief Cabinet Secretary Katsunobu Kato said.

Japan has been very prudent about making hasty decisions on implementing CBDC because of social challenges it could bring in the country, which is one of the most cash-dependent countries in the world.

However, China’s constant progress toward launching digital cash has stimulated a closer exploration of the idea. In order to catch up with its counterparts, Japan’s central bank has to form a new team that would focus on creating a CBDC and carry out joint research with other central banks in the world.

“The Ministry of Finance and other relevant ministries will deepen scrutiny on the need for issuing such digital currencies and their impact on the financial system,” Kato said.

Yoshihide Suga, the new prime minister of Japan, said his administration’s crucial policy priorities are digitalization and administrative reforms.

Summary

Central banks around the world are exploring the idea of issuing a central bank digital currency (CBDC). It looks like China will be the first country to roll out a CBDC, while Japan said it doesn’t plan to launch digital cash for now, but will investigate the subject more thoroughly.

About the Author


Headshot for author Mariliana Fotopoulou

Mariliana has an MSC in consumer analytics and business strategy. She has a special interest in fast-moving industries and big data.

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