Central banks across the world have taken a decision to acknowledge that cryptocurrencies are not going away and that their prized holding of fiat will eventually have no place in society.
Cash money is on its way out.
What’s in is Central Bank’s own digital currencies, from digital dollars to Chinese Yuan and more.
J. Christopher Giancarlo, the former Chair of the Commodity Futures Trading Commission (CFTC) and so-called “Crypto Dad” announced plans for a formal exploration of a United States central bank digital currency (CBDC).
“The digital 21st century is underserved by an analogue reserve currency,” said Chris Giancarlo, adding: “A digital dollar would help future-proof the greenback and allow individuals and global enterprises to make payments in dollars irrespective of space and time.”
Chris Giancarlo pointed out Accenture central bank projects that have included the Bank of Canada, the Monetary Authority of Singapore, European Central Bank, and most recently efforts by Sweden’s Riksbank – the world’s first central bank – to develop an e-Krona in a test environment.
The race to integrate crypto into global banking is real as public sector projects are already driving interest in fiat-backed cryptocurrencies by central and regional banks.
The U.S. dollar is the world’s “reserve currency” because it represents about 58% of all foreign exchange reserves in the world, according to the International Monetary Fund (IMF). Additionally, 40% of the world’s debt is denominated in dollars.
Some experts believe the U.S. dollar could fall behind as the defacto ecommerce currency if other nations launch state-sponsored stablecoin first.
In a blog post, the IMF said recently today’s fiat currencies are in flux “and innovation will transform the landscape of banking and money.”
Among other banking entities, the IMF has shown support for fiat-backed cryptocurrencies (Stablecoins), saying they can reduce the reliance on government-issued money, “and unlike bank transfers, crypto asset transactions can be cleared and settled quickly without an intermediary,” Dong He, deputy director of the IMF’s Monetary and Capital Markets Department, wrote in a post for the agency.
Facebook’s Libra is also a stablecoin, but in comparison to central bank issued digital currencies, Libra is a commercially driven private project and not central bank controlled.
Other efforts are cryptos in the form of tokens that could be asset-based or utility-based. Worthy of mentioning is JP Morgan Chase’s planned JPM Coin.
Regional adoption of CBDC
The recent World Economic Forum in Davos announced that in past six months have been a wake-up call for some central bank policy-makers where CBDC has risen to prominence as a potential solution to multiple challenges such as financial inclusion and payment‑system efficiency.
The World Economic Forum gathered insights from central bank researchers, global policy‑makers, international organizations and experts from over 40 institutions to create the first CBDC Policy‑Maker Toolkit.
“Any central bank digital currency implementation, including potentially with blockchain technology, will have a profound impact domestically and internationally,” said Sheila Warren, Head of Blockchain and Distributed Ledger Technology at the World Economic Forum.
The CBDC Policy‑Maker Toolkit provides high‑level guidance and information for retail, wholesale, cross‑border and private-sector issued “hybrid CBDC” as well as for large, small, emerging and developed countries. It also evaluates the role of distributed ledger technology within CBDC implementation and highlights important governance, user-data privacy, financial inclusion and security issues.
“We will pilot the new toolkit developed by the World Economic Forum,” said Mr. al Maraj, Governor, Central Bank of Bahrain. “We hope that it will be an opportunity to learn, grow and to adapt to the changes in the Fourth Industrial Revolution.”
A currency revolution coming
It’s unclear what form a central bank issued digital currency could take. It could be built on blockchain-like architecture but it doesn’t necessarily need to be.
The promise of a central bank digital currency (CBDC) is that it could make cross-border movement of money easier and improve traceability to fight corruption or money laundering, according to Henri Arslanian, global crypto leader at PwC.
Some experts say that a digital yuan could help China’s currency internationalize and challenge the dominance of the U.S. dollar.
The digital yuan could be used in trade and infrastructure deals along China’s Belt and Road Initiative.
China and the U.S. are not the only countries looking at issuing their own digital currencies.
The central banks of Britain, Japan, the euro zone, Sweden and Switzerland have grouped up with the Bank for International Settlements (BIS) to assess potential use cases for such currencies.
CBDC’s have gained momentum recently as central banks look to innovate in the face of competition from China and Facebook’s digital currency Libra, which has faced pushback from regulators worried about the potential risks of Libra to global financial stability.