Why central banks want to launch digital currencies | CNBC Reports

Summary

The concept of central bank digital currencies (CBDCs) is gaining momentum, with nearly 90% of central banks exploring them and 60% experimenting. Unlike cryptocurrencies, CBDCs would be issued by central banks and backed by their power, offering stability and security. They could potentially offer the convenience of payment apps, the trustworthiness of cash, and the benefits of blockchain technology. China is leading in CBDC development with its digital yuan, aiming to control the financial system and possibly reduce reliance on the U.S. dollar. While the European Central Bank is also planning a digital euro, concerns exist over potential impacts on monetary policy and the risk of CBDCs replacing bank deposits. As we move towards a cashless society, CBDCs could become as trusted and convenient as bank notes, but building this trust is crucial.

Takeaways

• 🏛️ The Bank of England was the first to issue banknotes in 1694, and now central banks focus on maintaining price stability.
• 🌐 Nearly 90% of central banks are exploring Central Bank Digital Currencies (CBDCs), with 60% already experimenting with them.
• 💡 The concept of digital money is not new, but CBDCs would be different from cryptocurrencies like Bitcoin, which are decentralized and not issued by a central bank.
• 📈 Bitcoin's value has surged due to its capped supply, leading some to call it 'digital gold', while central banks print more money in response to economic challenges like the pandemic.
• 🚧 Central banks are concerned that independent cryptocurrencies could weaken their control and lead to financial instability due to the lack of legal and regulatory safeguards.
• 💼 CBDCs would be legally recognized and backed by the central bank, unlike commercial bank savings which could be at risk if a bank collapses.
• 🔗 CBDCs could combine the convenience of payment apps with the trustworthiness of cash and the technological benefits of blockchain, like cryptocurrencies.
• 📊 Digital currencies could reduce the cost of retail payments, which in the U.S. is between 0.5% to 0.9% of GDP, and make payments faster and cheaper.
• 🌍 CBDCs could increase financial inclusion, as over 1.5 billion adults globally and many in the U.S. lack access to the financial system.
• 💰 Governments could use CBDCs to efficiently deliver stimulus checks or targeted payments to those most in need.
• 🇨🇳 China is leading in CBDC development with its digital yuan, aiming to control the financial system challenged by tech companies like Ant Pay and WeChat Pay, and potentially reduce reliance on the U.S. dollar in global trade.

Q & A

What was the Bank of England's initial role when it first started issuing banknotes?

The Bank of England's initial role was to issue banknotes as an alternative to coins for use as a means of payment.

What is the primary task of the Bank of England and similar central banks today?

The primary task of the Bank of England and similar central banks today is to maintain price stability.

What is a central bank digital currency (CBDC)?

A central bank digital currency (CBDC) is a form of money that is digital, issued by a central bank, and is not physical cash.

What percentage of central banks are currently exploring CBDCs?

Nearly 90% of central banks are exploring CBDCs.

How does a central bank digital currency differ from cryptocurrencies like Bitcoin?

Cryptocurrencies like Bitcoin are not issued by a central bank but are created through a decentralized network of computers using blockchain technology. In contrast, CBDCs would be issued and backed by a central bank.

Why did Facebook attempt to develop its own digital currency?

Facebook attempted to develop its own digital currency, initially called Libra and now known as Diem, to enter the digital currency market and potentially challenge existing financial systems.

What is the theoretical market capitalization of Bitcoin after Tesla's investment announcement?

Following Tesla's announcement of a $1.5 billion investment in Bitcoin, the cryptocurrency's price surged to new highs, giving it a theoretical market capitalization larger than the world's two largest payments processing companies, Visa and MasterCard.

Why are central banks concerned about the widespread adoption of independent cryptocurrencies?

Central banks are concerned that widespread adoption of independent cryptocurrencies could weaken their control over the financial system, potentially causing financial instability, as these cryptocurrencies lack the legal and regulatory safeguards of central bank money.

What are some benefits of issuing a central bank digital currency?

Benefits of issuing a central bank digital currency include faster and cheaper payments, immediate settlements, reduced processing delays, increased access to electronic payments for unbanked populations, and the ability for governments to easily deliver stimulus checks or targeted payments.

How does the distribution of CBDCs through commercial banks help maintain the stability of the financial system?

Distributing CBDCs through commercial banks helps maintain the stability of the financial system by avoiding direct dealing between the central bank and millions of citizens and businesses, and by integrating CBDCs with existing banking infrastructure.

What is the status of China's CBDC development?

China is the most advanced major economy in CBDC development. The People's Bank of China has been running tests of its digital currency since April 2020, with tens of thousands of consumers involved in pilot transactions totaling two billion yuan.

What are some potential geopolitical considerations for China with the development of a digital currency?

Potential geopolitical considerations for China include using a digital currency as a mechanism to shift away from the U.S. dollar in global trade, thereby reducing reliance on the U.S. dollar and potentially challenging its hegemonic status.