What are digital central bank currencies?

What are digital central bank currencies?

digital central bank currencies or CBDCs are an attempt to bring some of the alleged advantages of private digital currencies into the world of public funds under the patronage of the national central banks. This also means that CBDCs are theoretically safe in times of the financial crisis.

Comparisons are often made with cryptocurrencies, since some proposed CBDCs could use the same blockchain technology. However, this is not necessarily the case. In contrast to the best -known blockchain - the one used by Bitcoin - which is essentially a decentralized database, central banks will probably control their own private blockchains in most cases.

How far are the planning advanced?

Although there are only a few fully developed and used CBDCs, several countries have initiatives in an advanced stage. In China, E-Yuan CBDC is one of the most advanced among the great economies. In February, the "Red Packages" government distributed the digital coins to promote acceptance.

One of the few countries with a fully implemented CBDC are the Bahamas, whose sand is piloted in 2019 and a year later as a collaboration between the central bank, the payment card group MasterCard and the digital payment platform Island Pay was properly introduced.

other leading economies in Europe and North America are still in the exploration phase. In Great Britain, the Bank of England and the Ministry of Finance announced a CBDC-Taskforce to coordinate studies on a potential "Britcoin", although no concrete results have yet been presented. In the United States, the chairman of the Federal Reserve, Jerome Powell, said in September that the central bank "soon" will publish investigations and use of the introduction of a CBDC. Cryptocurrencies have become an increasingly polarized topic in the United States, with a similar split being reported among Fed officials about the idea of ​​a public digital currency.

Why are governments try to create CBDCs?

The impulse for CBDCs in western countries was at least partially inspired by two potential challenges - the first driven by fears that private companies could exceed the powers of the supervisory authorities, and the second of geopolitical concerns.

stable coins that are coupled to US dollars received massive acceptance last year. The nominal value of their coins in circulation has increased from less than $ 30 billion to around $ 140 billion. While a large part of it is held within the cryptocurrency ecosystem, there are growing efforts to use stable coins for quick and cheap transfers.

Novi, the digital wallet of Meta (formerly Facebook), tests the pax dollar stable for transfers, including transfers in Guatemala and parts of the USA. (Metas own stablecoin, diem, is still pending-concerns about a coin in possession and operations of the social network were of central importance for stable coin regulation.)

The supervisory authorities have expressed concerns about private stable coins, including the challenges they could represent for the financial stability and effectiveness of monetary policy and the well -being of consumers. Some believe that an effective CBDC could reduce the desire of consumers to rely on stable coins, or at least offer retailers better.

There are also concerns about China's E-Yuan project, one of the more advanced CBDC initiatives. Beijing wants to expand the system before the Olympic Winter Games in Beijing in February. Critics in the United States have expressed fears that the Use of the Chinese government would enable the Chinese government to prevent buyers from doing so, the coin in shops that have violated their guidelines, as well as mass monitoring.

Proponents of CBDCS say that they offer advantages that are often attributed to stable coins, including lower costs and faster payment processing as existing systems in some parts of the world. It is also discussed about their ability to implement monetary policy more effectively, for example to set economic impulses according to financial crises.

What are the risks?

A concern in connection with CBDCs is the potential effects on traditional private customer banks. If consumers have access to liquidy cash that is fully covered by central banks, CBDCs can become a safe port in the event of economic instability, which means that the banks are withdrawn in cash and that it may lead to bank runs.

Similar to the concern about Beijing's control of the E-Yuan, there are debates about the ethics of the "programmable money". If a central bank can effectively control consumer expenses, this could possibly undermine fundamental rights and free choice.

Finally, there has been a concern about financial inclusion that has only increased during pandemic, since the efforts to digitize the money have been reinforced. CBDCs can be unreachable for people with older devices or without access to digital wallets, so that caution is required to avoid further disenfranchisement of the old and endangered people.