Why central banks are now taking digital currency seriously – BRINK – Global risk news and insights


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The surge in the price of Bitcoin has raised the question of whether countries should implement their own digital currencies. A digital currency would be issued by central banks, like banknotes, while cryptocurrencies rely on distributed ledgers like the blockchain.

China already has started piloting a digital yuan currency in several major cities, and the Federal Reserve Chairman said that he will hold a public dialogue on the idea of ​​creating a central bank digital currency. Sergio Focardi is professor of finance at the Pôle Universitaire Léonard de Vinci in Paris.

FOCARDI: At the moment we have a two tier banking system in most economies. There are commercial banks and a central bank. Commercial banks have accounts with customers, while central banks only have accounts with commercial banks.

A central bank performs a number of supervisory activities, but it also creates the base currency, formed by banknotes. Bank accounts are debts that each bank owes its customers, payable in banknotes. But these days the amount of money in bank accounts far exceeds any possible amount of banknotes, so the idea that a business could go to a bank and say, “Hey, I want my money back. in the form of banknotes’ does not make sense.

In addition, the public is moving further and further away from banknotes. If you travel to countries like Iceland or Norway, the use of banknotes is now really limited, for a number of reasons.

Play the same role as banknotes

EDGE: So would a central bank’s digital currency play the same role as a banknote?

FOCARDI: There are currently many projects for central bank digital currency. Most of the major central banks are considering issuing some version of digital currency. If you look at the Bank of Sweden’s E-Krona project, they have a means of payment which has some of the same characteristics as banknotes, except that it is electronic. So it’s peer to peer, it’s anonymous, but it’s electronic.

At present, the People’s Bank of China (PBOC) appears to be the first central bank ready to deploy digital currency. They have already completed the testing phase and are ready to launch the digital yuan. The digital yuan is not based on blockchain technology. The PBOC is careful not to endorse too strongly a specific technology.

From the user’s perspective, the digital yuan is like any other electronic wallet. The goal, however, is to replace cash and not bank money, and therefore commercial banks will play a role in its distribution.

The European Union is still in the research phase. A 2020 report outlines the future plan of the European Union. However, no pilot project has started yet. The first objective is to make the European banking system more modern and efficient, and the technologies have yet to be decided.

The creation of digital currency is not in itself a major source of risk. The real problem is what governments want to do with this money.

Digital currency could be used for welfare payments

The Federal Reserve is discussing its intention to issue a digital dollar, but no test plans have been identified. One thing that could distinguish the digital dollar from other central bank digital currencies (CBDCs) is its use as a welfare tool. With a digital dollar, the FED would be able to pay out social benefits, including lump sums paid to citizens.

It is fair to say that there are many projects and many possible solutions. Cryptocurrencies have sparked central bank interest in digital currency, but the end result could be completely different from any current cryptocurrency.

EDGE: If this type of central bank digital currency were introduced, would it eliminate commercial banks?

FOCARDI: That’s a big question mark. The creation of digital currency is not in itself a major source of risk. The real problem is what governments want to do with this money.

There are drastic scenarios in which the central bank issues digital currency and has accounts with the public – with you and me. But then central banks would be in competition with commercial banks, and central banks are not equipped to deal with millions of customers.

A less drastic scenario is where they essentially replace banknotes with digital currency, and commercial banks continue to operate as before. This is what we think today: most central banks are trying to replace the use of banknotes with an electronic and more manageable system, still anonymous, but which does not replace commercial banks.

Central banks keep tabs on Bitcoin

EDGE: What would a central bank digital currency do to Bitcoin? Do you think these cryptocurrencies will continue to exist?

FOCARDI: Today there are 150 alternative currencies, but the only one that really continues is Bitcoin – the rest are marginal. I don’t really believe governments will just let Bitcoin grow.

No government will want a power station that can control financial transactions without being controlled. I don’t think cryptocurrencies will become major players, at least for the foreseeable future, because it goes against the interests of governments.

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About Eleanor Blackburn

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