Daily Management Review

Central Banks Plan Digital Cash To Ward Of Threat Of Private Crypto Currencies


Central Banks Plan Digital Cash To Ward Of Threat Of Private Crypto Currencies
The prospect of issuing digital currencies of their own is being considered for some time now by some of the largest central banks of the world – as well as some of the smaller ones.
If such projects are actually launched by central banks, it will help  holders to make payments through the internet and potentially even offline and such new payment system will compete with the currently available electronic payment systems such as digital wallets, online banks or crypto currencies.
What would distinguish a digital currency from the ones that are currently private ones such as bitcoin is that they would be backed by one or more central banks which will make it absolutely "risk-free" just like using banknotes and coins.
Over the past one year since Facebook announced plans for creating its own virtual token and with digital payments increasing during the novel coronavirus pandemic, the pace of such central bank backed cyptocurrency projects have switched into higher gear even though most projects are still at an early stage.
How a digital currency could function was set out on Friday by a group of seven central banks coordinated by the Bank for International Settlements.
A central bank digital currency (CBDC) is the electronic equivalent of cash. A direct claim on the central bank will be granted by the currency just like a banknote or coin and will bypass commercial banks. It will also offer a much greater degree of security since central banks can never run out of the currencies that they issue.
So far only financial institutions have access to central bank money beyond physical cash. There can however be major economic and financial repercussions if it is extended to the broader public.
With dwindling usage if cash, a CBDC would provide a basic way of making payments for all at a time, say authorities. Additionally, a safer and potentially cheaper alternative to private solutions would also be offered by them.
The main concerns for central banks is that if private currencies such as bitcoin or Facebook's proposed Libra are adopted widely by people and used in transactions, central banks could lose control over the payment system.
In such situations, detecting money-laundering and terrorism financing would become harder for authorities and thereby e grip of the central banks on supply of money could be weakened. And control over money supply is the major way that central banks steer the economy.
The launch of a CBDC could be a means to foster financial inclusion in many emerging economies that have a larger unbanked population. That could in turn expand the reach of the monetary policies of central banks.
It would be easy to transfer CBDC offline and anonymously as it could be issued in the form of a token that gets saved on a physical device such as a mobile phone or a pre-paid card. CBDC could also be kept in accounts managed by an intermediary like a bank which would make it easier for authorities to monitor such money and possible also pay an interest rate as for current forms of money.