Global digital currencies: Where do central banks stand?

Central banks are taking a far more cautious approach before entering into the digital currencies arena, particularly as they need to take into account their respective economies and their financial networks.

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Mike Blakesley, Director of Experience (UX) Design, projekt202

Amdocs Financial Services

19 Apr 2022

Global digital currencies: Where do central banks stand?

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There's massive interest in cryptocurrencies and their ability to offer a new alternative global currency. But what is the position of central banks, and what do they mean for the future of the monetary system?

While Decentralized Finance (DeFi) crypto currencies like Bitcoin, XRP, Ether, Ripple, LiteCoin, and meme alt-coins like Dogecoin have gotten most of the world’s attention over the past few years, central banks have been working to create their own centralized digital currencies. There are several key differences between these two main categories of digital currencies, but perhaps the most direct difference is that Central Bank Digital Currencies (CBDC) are intended to be controlled digital representations of existing fiat currencies like the USD rather than decentralized virtual currencies. 

As such many central banks have recognized the popularity and emergence of digital currencies that easily cross global boundaries. Numerous countries are exploring CBDCs at a varied pace, as they offer many advantages like lower transaction costs and support financial inclusion. However, a central bank issuing a digital currency is not the same as cryptocurrency. The main difference being that all cryptocurrencies run on distributed-ledger technology, meaning that multiple devices all over the world are constantly verifying the accuracy of the transaction, therefore they are not controlled by one central hub.

Central banks are taking a far more cautious approach before entering into the digital currencies arena, particularly as they need to take into account their respective economies and their financial networks before issuing a digital version (CBDC) of their fiat hard currency. Equally they have to account for demand and supply issues so as not to destabilize economies. The Atlantic Council who has produced this interesting tracker, showing the latest status of forming a digital currency, from the research stage right through to launch. From this report, nearly 45% of 91 identified countries are currently in the research phase and 16% are in the pilot phase.

This point in time for our global currencies is an important generational shift, in the way our society operates with our money supply. As we have seen with many industries which have become completely digital, this similar shift is being witnessed in the money circulating in our markets. Historically central banks control the circulation of currencies with the government, to ensure there is no oversupply at the wrong times which would affect inflation. This control also ensures there is limited risk of fraud and counterfeiting, while regulatory frameworks keep the system functioning in a democratic way.

Perhaps the recent technical problems with the pilot program of the Eastern Caribbean Central Bank (ECCB) digital currency named DCash, taking it offline for weeks, is just a glimpse into the fears many have about completely depending on a cashless, digital currency system. Meanwhile in Jamaica, officials have been ridiculed on social media for adopting the name Jam-Dex for their country’s official DC. The Dex portion being a popular acronym for Decentralized Exchange, despite this new CBDC being anything but decentralized.

The second largest global economy by GDP, China has been managing some strong positions on digital currency. In mid-2021, China placed heavy controls on cryptos by banning mining amid fears they might destabilize their economies and become a massive drain on available energy production. Simultaneously, China has also been moving forward with the guarded rollout of its CBDC, the digital renminbi, also referred to as the e-CNY. While issues of speed and transaction volume persist, China continues to push their monetary policy and technology forward, including the development of a hybrid ledger system for their e-CNY wallet application.

For cryptocurrencies to be successful they will need to overcome government hurdles that no doubt will be placed in their way to prevent them from operating, especially if governments follow through with proliferating CBDCs. We will wait to see how they will survive in such an environment. In the meantime, there may be yet some way to go before we see central banks move en masse into this area, but there is no doubt the FinTechs are taking on crypto with an accelerated pace, and are trying to make DeFi a reality for consumers. 

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