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.

Outlines

00:00

🏦 The Emergence of Central Bank Digital Currencies (CBDCs)

The Bank of England, established in 1694, was the first to issue banknotes as an alternative to coins. Fast forward to the present, and central banks globally are exploring the concept of CBDCs, a digital form of money. The shift from 80% to 90% of central banks exploring CBDCs, and from 40% to 60% experimenting with them, indicates a significant trend. Unlike cryptocurrencies like Bitcoin, which operate on decentralized networks, CBDCs would be issued and backed by central banks, offering legal and regulatory safeguards. The potential benefits of CBDCs include faster and cheaper transactions, increased financial inclusion, and the ability for governments to make direct payments to citizens. The People's Bank of China is leading the way with its digital currency e-yuan, conducting extensive trials and aiming to counter the influence of private fintech payment giants like Ant Pay and WeChat Pay.

05:05

🌐 Geopolitical and Monetary Policy Implications of CBDCs

China's development of the e-yuan is not just about domestic financial control but also has geopolitical dimensions, potentially allowing for a reduction in reliance on the U.S. dollar for international trade. The digital currency could offer a technological edge, prompting a shift in perception towards the renminbi. The European Central Bank is also considering a digital euro but faces challenges such as anti-money laundering, financing of terrorism, and user privacy. There are concerns that CBDCs could interfere with monetary policy effectiveness; however, they are currently discussed as part of the payments system rather than as a monetary policy tool. The introduction of CBDCs could lead to a preference for digital currencies over commercial bank deposits, impacting bank funding and the broader economy. As society moves towards cashlessness, CBDCs may eventually be as trusted and convenient as physical banknotes, but building this trust will be key.

Keywords

💡Bank of England

The Bank of England, established in 1694, was the first public bank to issue banknotes as an alternative to coins for payment. It is significant in the video as it marks the historical beginning of a shift towards more convenient forms of payment, which is a precursor to the current exploration of central bank digital currencies (CBDCs).

💡Central Bank Digital Currencies (CBDCs)

CBDCs are a revolutionary concept of money in digital form, issued by a country's central bank. They are different from cryptocurrencies as they are centralized and regulated. In the video, CBDCs are portrayed as the next evolution in monetary systems, with nearly 90% of central banks exploring them, signifying a potential shift in global finance.

💡Cryptocurrencies

Cryptocurrencies are digital or virtual currencies that use cryptography for security and operate independently of a central authority. Bitcoin, mentioned in the video, is a prime example that has gained significant popularity and value. The rise of cryptocurrencies has influenced central banks to consider issuing their own digital currencies to maintain control over the financial system.

💡Blockchain Technology

Blockchain technology is the decentralized and distributed ledger system that underpins cryptocurrencies. It allows for secure and transparent transactions without the need for a central authority. The video discusses the potential for CBDCs to benefit from the same technology, enhancing trust and efficiency in digital transactions.

💡Libra/Diem

Libra, now known as Diem, is a digital currency initiative initially announced by Facebook in 2019. It represents a significant private sector effort to establish a global digital currency. The video highlights the impact of such initiatives on central banks, prompting them to consider issuing their own digital currencies to remain relevant in the digital financial landscape.

💡Price Stability

Price stability is a primary task of central banks, including maintaining low and stable inflation rates. The video mentions this in the context of central banks' roles and how the advent of CBDCs could potentially influence their ability to manage monetary policy and, by extension, price stability.

💡Digital Wallet

A digital wallet is an electronic device or service that allows users to make electronic transactions. The video discusses the potential for CBDCs to be distributed through commercial banks with their own digital wallets, which could eventually displace current payment technologies like Ant Pay, offering a more integrated and convenient payment method.

💡Geographical Considerations

The video touches on how CBDCs could have geopolitical implications, such as China's efforts to potentially reduce its reliance on the U.S. dollar for international trade. The issuance of a digital currency like the e-yuan could provide an alternative means of trade, potentially diminishing the dollar's hegemonic status.

💡Monetary Policy

Monetary policy refers to the actions of a central bank aimed at influencing the economy through interest rates and money supply. The video raises the question of whether CBDCs could interfere with monetary policy effectiveness. It suggests that while CBDCs are currently discussed in the context of payment systems, their potential impact on monetary policy is still uncertain.

💡Financial Stability

Financial stability is the condition of a financial system where its individual components are able to absorb shocks without significant disruptions. The video expresses concerns that widespread adoption of independent cryptocurrencies could weaken central banks' control, leading to financial instability. CBDCs are presented as a potential solution to maintain this stability.

💡Cashless Society

A cashless society is one where financial transactions are conducted electronically rather than through the exchange of physical currency. The video speculates on the potential for CBDCs to become as trusted and convenient as banknotes in a society moving towards cashless transactions, highlighting the benefits of faster and cheaper payments.

Highlights

In 1694, the Bank of England became the first public bank to issue banknotes regularly.

Central banks are exploring Central Bank Digital Currencies (CBDCs), with nearly 90% currently engaged in exploration.

60% of central banks are now experimenting with CBDCs, up from 40% last year.

Cryptocurrencies like Bitcoin have gained popularity, influencing the concept of digital money.

Bitcoin's market cap surpassed that of Visa and MasterCard after Tesla's $1.5 billion investment.

Cryptocurrencies operate on a decentralized network, unlike traditional money issued by central banks.

Facebook's digital currency, now known as Diem, was initially announced as Libra in 2019.

Central bankers see a threat from independent cryptocurrencies and are considering issuing their own digital currencies.

Bitcoin is sometimes called 'digital gold' due to its capped supply and perceived value in times of monetary easing.

Widespread adoption of cryptocurrencies could weaken central banks' control and cause financial instability.

CBDCs are proposed as a solution, combining the benefits of cash, payment apps, and blockchain technology.

CBDCs are legally recognized and backed by the central bank, unlike commercial bank savings.

CBDCs could be distributed through commercial banks, similar to bank notes.

Digital currencies could reduce the cost of retail payments and increase accessibility.

Over 1.5 billion adults globally lack access to the financial system; CBDCs could help include them.

Digital currencies could facilitate easier government stimulus payments and targeted aid.

China is leading in CBDC development, with extensive pilot programs and transactions in digital yuan.

The digital yuan could challenge dominant payment technologies like Ant Pay and WeChat Pay in China.

China's digital currency could serve geopolitical purposes, potentially reducing reliance on the U.S. dollar.

The European Central Bank is planning a digital euro, although it may take several years to launch.

Central banks are considering the impact of CBDCs on monetary policy and the financial system.

CBDCs could potentially replace traditional cash but are not expected to bear interest like bank notes.

There are concerns that CBDCs could lead to a mass withdrawal from commercial banks in a crisis.

The trust in CBDCs will be built on the trust in the central bank's ability to maintain the currency's value.

Transcripts

In 1694 the Bank of England became the first public bank to regularly issue banknotes

as an alternative to coins, as a means of payment.

Three centuries later, it’s primarily tasked with maintaining price stability,

much like any other central bank across the world.

But these cautious institutions are now buzzing with talk of a revolutionary concept,

a form of money you cannot see: central bank digital currencies.

When you ask central banks around the world whether they are exploring CBDC,

one year ago the answer was 80% of them were exploring, and now it's nearly 90%.

Last year, 40% were experimenting and now it's 60%.

The vast majority of central banks are exploring CBDC.

The idea of digital money is not new. Many of us use debit and credit cards

or payments apps for transactions, but what would make a central bank digital currency different?

One of the big financial developments over the last few years has been the rise in popularity of cryptocurrencies,

with one in particular, bitcoin, standing out.

Following Tesla’s announcement that it bought $1.5 billion worth of bitcoin in February 2021,

the volatile cryptocurrency’s price surged to new highs, giving it a theoretical market capitalization

that is even larger than the world's two largest payments processing companies: Visa and MasterCard.

Unlike traditional money, cryptocurrencies are not issued by a central bank,

but rather via a decentralized network of computers, typically using blockchain technology.

Even Facebook is trying to get in on the act with the 2019 announcement that it would develop its own digital currency,

known at the time as Libra and now rebadged as Diem.

And so at that point central bankers started to realize they were really under some threat.

And the question became, if we can't beat them, do we join them?

Investors in bitcoin believe that because there is a theoretical cap on the number of bitcoins that can ever be mined,

the cryptocurrency will become increasingly valuable at a time when central banks have been

printing more money than ever before to arrest the economic fallout from the pandemic.

That's why people sometimes call bitcoin ‘digital gold’.

Many central banks are worried that the widespread adoption

of these independent cryptocurrencies could weaken their control over the financial system.

This could cause financial instability, especially because cryptocurrencies do not have

the legal or the regulatory safeguards that central bank money does. So why not issue a digital currency of their own?

Currently, regular bank deposits, cash and cryptocurrencies issued by the private sector,

such as Diem and Bitcoin, all have a few features that make them useful,

but the hope is that publicly available CBDCs would have all these desirable characteristics.

Unlike your savings in a commercial bank, which rely on the bank’s promise to fulfill,

CBDCs are recognized by law and backed by the power of the central bank, which cannot go bankrupt.

For example, if a commercial bank collapses, part of your savings could potentially be wiped out.

But this wouldn’t be the case for CBDCs, which could be as trusted as cash, as convenient as a payment app,

yet also benefit from the same blockchain technology which underpins cryptocurrencies.

And just like cash, CBDCs could be distributed through commercial banks, avoiding too much disruption to the financial system

or the central bank having to deal directly with many millions of citizens and businesses.

Think of bank notes, which are the closest equivalent to central bank digital currencies that we have today.

Except that they are on paper, of course. This is money that is issued by the central bank

and used daily in retail payments. The central bank sells bank notes to the commercial banks,

and then the commercial banks distribute bank notes through ATMs to their clients.

This means that everyone could have access to this digital currency, which could bring a lot of benefits.

It could make payments faster, allowing for immediate settlements

and no processing delays. And it could also make payments cheaper.

In the U.S., the aggregate cost of making retail payments ranges from 0.5% to 0.9% of GDP.

Digital currencies would reduce those costs.

It also means that more people could have access to electronic payments.

Currently, over 1.5 billion adults across the globe don’t have access to the financial system

and even in an advanced economy such as the U.S., more than 6% of Americans don't have a bank account.

Issuing digital currencies could also make it easier for governments to deliver stimulus checks,

or even go one step further and make targeted payments to those deemed most in need.

So how soon could central bank digital currencies become a reality?

China is the major economy which is most advanced in its CBDC development.

The People’s Bank of China has been running tests of its digital currency since April 2020

with the help of four banks in the country. Tens of thousands of consumers have already

been involved with the pilot, spending two billion yuan in over four million transactions.

For China, it could also be a means of re-asserting control over a financial system

challenged by the rapid growth of fintech companies

Ant Pay and WeChat, these are the dominant payment technologies in China,

and they are in the hands of Alibaba and Tencent, and if Beijing can wrest that back then I think they will.

And the way that it’s set up, the e-yuan, is that it will still be effectively very integrated

with the commercial banks but it is effectively a direct challenge to the payment technologies,

they are trying to ultimately displace them. The e-yuan's going to have its own digital wallet

at the commercial bank and over time people will probably just find it more convenient

to use that, and thereby displacing Ant Pay, for example.

There may also be a geopolitical consideration for China, providing a mechanism to shift away from using the U.S. dollar.

There is no doubt that Beijing views the U.S. dollar as a strategic advantage the U.S. has.

The problem is that most of the trade, the real world trade, is denominated and invoiced in U.S. dollars, right,

and China sees this and it's hard for them to sort of push renminbi into the global financial system,

the global trading system, but they’re trying.

But if they had a digital currency that would be potentially a really fascinating angle.

So you can see, if it has got a technological advantage, that perhaps this is a way for people to think

about the renminbi in a different way and perhaps, you know, ultimately start to chip away at hegemonic status of the dollar.

But it's not just China.

The European Central Bank has plans for a digital euro, although it may be a few years before it is available.

We are going to have to address all the issues of anti-money laundering, financing of terrorism,

privacy of users and all their information, the appropriate technology that will carry that digital currency,

and this is, you know, a project that could probably take us, two, three, four years before it is launched.

This has got people wondering whether issuing a central bank digital currency

could interfere with the effectiveness of monetary policy.

Central banks have addressed CBDCs so far, really as part of a payments discussion.

That’s a discussion for monetary policy committees, for the ECB governing council,

whether they want to use CBDC or not, but it’s too early to have that discussion.

But theoretically if the central bank wanted, they could also pass on negative rates

to the holders of central bank digital currencies?

Think of CBDC as being the future of bank notes, bank notes do not bear interest.

And so, if you follow that line of reasoning then CBDC should not bear interest.

And if you want CBDC to bear interest then you're creating something different.

A lot depends on how much people would use CBDCs, and no central bank wants them

to completely replace traditional cash, but rather to compliment it.

One risk associated with CBDCs is that in an extreme situation, such as after a financial crash,

you could see people withdrawing their deposits from commercial banks

and opting to store their money in digital currencies backed by the central bank.

Trouble would be if CBDC would replace bank deposits in a large amount

because then what happens is that savers could shift their savings from bank account to CBDC.

Then banks could have a problem for funding. This might have an effect on the financing of whole economy.

People can shift saving from bank account to CBDC just with a click. This would be very dangerous obviously.

As we move towards a more cashless society, will central bank digital currencies ever become

as trusted and as convenient as bank notes? Quite possibly, though it may take months, maybe even years.

The trust in private money is built on the trust in the currency

and the fact that behind that there is a central bank which has tools to keep the value of the currency.

We have to buy this trust and that's why we need to stay in the economy

and the way to stay in the economy is to make sure people trust us.

Thank you for watching. Would you ever use a central bank digital currency?

Let us know in the comments, and don't forget to subscribe.