Connect with us

Hi, what are you looking for?

Economy

EXPLAINER | Bitcoin’s mainstream charge raises stakes for central bank digital cash

LONDON – As cryptocurrencies increasingly go mainstream, pressure is growing on the world’s biggest central banks to move forward with their plans to issue digital cash and fend off private sector threats to traditional money.

The biggest cryptocurrency, bitcoin, has shifted from the fringes of finance towards embrace by major investors, companies and even cities. Tesla Inc’s $1.5 billion bet has sent bitcoin to record highs of almost $50,000 and the Facebook-backed digital currency Diem, formerly known as Libra, aims to launch this year.

Central banks from the Group of Seven nations set out in October how a digital currency could function, though progress has been slow. The communique from last week’s G7 finance ministers’ meeting did not mention the nascent technology.

Here’s the latest on central bank digital currencies (CBDC).

 

WHAT ARE THEY?

CBDCs are the electronic equivalent of cash.

Like banknotes or coins, they would give holders a direct claim on the central bank, leapfrogging commercial banks. Backed by central banks, they would be as “risk-free” as traditional money, and let holders make online payments.

Access to central bank money beyond physical cash has so far been restricted to financial institutions. Extending it to the broader public would have major economic and financial repercussions.

 

WHY DO CENTRAL BANKS THINK WE NEED IT?

Central banks fear losing control of the global payments system to cryptocurrencies, which are typically not controlled by any central body – or to private entities, such as in the case of Diem.

That could weaken central banks’ grip on money supply, one of the main avenues for steering economies. And the threat has grown more real amid the snowballing mainstream embrace of digital currencies.

Financial firms BNY Mellon and Mastercard said last week they would offer support for digital assets, while the city of Miami is seeking to allow the use of bitcoin for paying workers, and for fee and tax payments.

As the use of physical cash declines, a CBDC would be a safer digital payments alternative to cryptocurrencies.

 

WHAT WOULD A CBDC LOOK LIKE?

Here’s where views differ.

A CBDC could take the form of a token saved on a physical device, like a mobile phone or a pre-paid card, making it easier to transfer offline.

Alternatively, it could exist in accounts managed by an intermediary like a bank, which would help authorities police it and potentially remunerate it with an interest rate.

While the idea of a CBDC was born in part as a response to cryptocurrencies, there’s nothing to say it should use blockchain, the distributed ledger that powers these tokens.

The People’s Bank of China said its digital yuan would not rely on blockchain.

 

WHICH CENTRAL BANKS ARE LEADING?

The People’s Bank of China aims to become the first major central bank to issue a CBDC, part of its push to internationalise the yuan and reduce dependence on the dollar-dominated payment system.

State-run Chinese commercial banks are already testing a digital wallet application, local media reports said. E-commerce company JD.com Inc in December said it was China’s first virtual platform to accept the homegrown digital currency.

The European Central Bank and the Bank of England have launched consultations, though ECB President Christine Lagarde said last month any digital euro would take years. The Bank of Japan and the U.S. Federal Reserve have taken a backseat.

Sweden’s Riksbank has begun testing an e-krona, while the Bank of Canada has also accelerated work on its digital currency.

Smaller nations are forging ahead, too: The Bahamas last year become the first nation to roll out a CBDC nationwide.

 

WHAT ARE THE RISKS?

Central banks fear any mass migration to CBDC would hollow out commercial banks, depriving them of a cheap and stable source of funding like retail deposits.

In a crisis, this would make them vulnerable to a run on their coffers as clients would prefer the safety of an account guaranteed by the central bank.

For this reason, most designs envision a cap on how much each consumer would be allowed to hold in CBDC. Remuneration rates might be lower to reduce the attraction. – Reuters

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Get the daily email that makes reading the news actually enjoyable. Stay informed and entertained, for free.
Your information is secure and your privacy is protected. By opting in you agree to receive emails from us. Remember that you can opt-out any time, we hate spam too!

Latest

Economy

WASHINGTON D.C. — The United States is seeking to form a coalition of countries to drive negotiations on a global plastic pollution treaty, weeks...

Economy

By Diego Gabriel C. Robles  THE WORLD BANK (WB) upgraded its growth forecast for the Philippines for this year and 2023, citing an “accommodative”...

Economy

THE PHILIPPINE auto industry’s sales recovery will likely be derailed if a measure reimposing excise taxes on pickup trucks is signed into law, according...

Economy

THE BANGKO SENTRAL ng Pilipinas (BSP) may deliver a second off-cycle rate hike in early November when the US Federal Reserve is expected to...

Economy

THE ASIAN Development Bank (ADB) is planning to allocate at least $14 billion for a program aimed at easing a food crisis in the...

Investing

With the reversal of the 1.25% rise in National Insurance Contributions happening on the 6th of November, employers across the nation have an opportunity...

You May Also Like

Investing

Having a good Instagram marketing agency to back up your Instagram account is an absolute must going into the new year. With competition stronger...

Investing

The minute that any question pops into your head, you can simply ask Google. No longer do we have to pour over books and...

Investing

Insomnia is the most common sleep disorder in the global population. Therefore, it is a problem that many people suffer or have suffered throughout...

Economy

Ivermectin, an existing drug against parasites including head lice, has had a checkered history when it comes to treating COVID-19. The bulk of studies...

Disclaimer: SmartRetirementReport.com, its managers, its employees, and assigns (collectively "The Company") do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

Copyright © 2021 SmartRetirementReport. All Rights Reserved.