Why Are 80% of Central Banks Looking into Digital Currencies?

In 2019, 80% of central banks were engaged in work related to central bank digital currency (CBDC), compared with 70% the previous year. Amongst these, 40% had progressed from conceptual research to experiments or proofs-of-concept, and 10% had developed pilot programs, according to a new survey by the Bank for International Settlements (BIS).

The study, which was carried out in the latter part of 2019 and included participation from 66 central banks, found that monetary authorities around the world continued to work on CBDC in 2019 with some accelerating deployment.

Central banks continue to work on CBDC, BIS Papers No 107 Impending arrival – a sequel to the survey on central bank digital currency, January 2020

Respondents cited several motivations and reasons why they investigated CBDCs including payments safety/robustness, financial stability, as well as efficiency for both domestic and cross-border payments.

Motivations for issuing a general purpose CBDC, BIS Papers No 107 Impending arrival – a sequel to the survey on central bank digital currency, January 2020

In 2019, central banks were more confident on issuing any type of CBDC than the previous year despite that level remaining low. In fact, about 70% of central banks saw themselves as unlikely to issue any type of CBDC in the foreseeable future.

Nevertheless, 10% said they were likely to issue a general purpose CBDC in the short term (up to three years), and 20% in the medium term (up to six years). Fewer central banks, however, expected to issue wholesale CBDCs in either the short or medium term.

The likelihood of issuing a CBDC is increasing, BIS Papers No 107 Impending arrival – a sequel to the survey on central bank digital currency, January 2020

Interestingly, the research found that central banks of emerging market economies felt more likely to issue a CBDC than did their advanced economy peers, showcasing stronger motivations.

The rise of CBDC

A CBDC is a digitized version of sovereign currency, generally conceived to be equal to physical cash or reserves held at the central bank.

CBDCs differ from other forms of digital or virtual currencies, including cryptocurrencies such as bitcoin and stablecoins, which are not issued by central banks or typically considered legal tender.

CBDCs can use centralized or decentralized technology systems, and can be destined for wholesale settlements (wholesale CBDCs) or for the general public (general purpose/retail CBDCs).

Over the past couple of years, CBDC has witnessed rising interest coming from central banks, ministries of finance and other institutions because of its potential to address challenges such as financial inclusion and payment system stability, as well as for its many positive implications in regards to economic growth, technology innovation and increased transaction efficiencies.

Academic and policy research on CBDC, as well as technological experimentation, started proliferating in 2014 with the Bank of England being first to initiate a global discussion on the prospects for the introduction of a CBDC. Since then, numerous central banks have been actively evaluating and developing CBDCs.

China’s central bank has been working on a CBDC for the last six years and is now preparing to test the digital currency, according to a January report by NPR.

The National Bank of Cambodia has developed a full-scale deployment of a quasi-form of CBDC as part of Project Bakong, which it plans to launch in the first quarter of 2020.

And the Bank of Thailand is leading a wholesale CBDC project called Project Inthanon, which aims to develop and test a proof of concept for domestic wholesale funds transfer.

Amid the rise to prominence of CBDC, the World Economic Forum (WEF) released last month a framework to help central banks evaluate, design and potentially deploy CBDC.

Gathering insights from central bank researchers, global policy makers, international organization and experts, WEF created the CBDC Policy-Maker Toolkit which aims to help central banks evaluate whether a CBDC is the right fit for their economy and guide them through the evaluation, design and deployment processes.

The paper provides guidance and information on the different types of CBDCs, and takes users through the different steps of creation. It also evaluates the role of distributed ledger technology within CBDC implementation.

In addition to the release of the paper, WEF announced last month the establishment of the Global Consortium for Digital Currency Governance, the first global consortium focused on designing a framework for the governance of digital currencies.

Members and backers of the initiative include the South African Reserve Bank, the Central Bank of Kenya, the Bank of England, the Monetary Authority of Singapore, the Central Bank of Bahrain, and Facebook’s Libra stablecoin project.

Source: Fintechnews Switzerland