TLDR. Bitcoin’s price rebound and the advent of Libra so far this year, has caused many to reconsider and some even to change sides. Debates about Central Bank Digital Currencies (CBDC) are now gathering great attention worldwide. Central banks may have to issue their own digital currencies sooner than expected. A number of central banks, including the People Bank of China (PBoC), Bank of Canada (Project Jasper), the ECB, the Bank of Japan (Project Stella) and the Monetary Authority of Singapore (Project Ubin), have already run experiments operating DLT-based CBDC.
A few days ago, Arunkumar posted here on Dailyfintech.com “China’s digital currency could be a response to Libra” and Anthony Pompliano tweeted: “Every banker secretly wants to be a Bitcoiner!!”
Central banks have been very dismissive of cryptocurrencies. While many central banks do not have immediate plans to issue digital currencies, some are making announcements and others are seriously considering whether they should issue their own digital currencies.
Cash is being used less and less, and has nearly disappeared in countries such as Sweden and China. At the same time, digital payment systems like PayPal, Alipay, WeChat and now Libra, offer attractive alternatives to services once provided by traditional commercial banks.
Central banks can no longer dismiss Bitcoin, Libra and other cryptocurrencies. In most countries the thinking seems to be geared towards creating a new cryptocurrency, that is controlled by the central bank, instead of accepting Bitcoin as an official form of payment.
Since 2014, China’s digital currency has been in the research and development stage. Ten days ago, the People Bank of China (PBoC) is said it’s almost ready to launch its own CBDC.
China is not the only country around the world that is planning their own CBDC. According to a report from the Bank of International Settlements (BIS), 70% of central banks (based on 63 central banks that participated in the survey) are researching the issuance of a CBDC.
CBDC initiatives around the World
In 2016, Singapore, the Monetary Authority of Singapore (MAS) conceived Project Ubin as an opportunity for Singapore to take a leading role in the research on central bank currency on a distributed ledger and Central Bank Digital Currencies (CBDCs). In May this year, the central banks of Canada and Singapore concluded a successful trial of cross-border payments using blockchain technology and central bank digital currencies.
Last year, after the US trade sanctions on Iran, the country announced the Crypto-Rial. A month ago, the Central Bank of Iran (CBI) announced that its close to unveiling a national cryptocurrency backed by the country’s gold reserves, that it will be mined by the CBI and a consortium of Iranian private IT firms.
In February 2018, the Marshall Islands issued the Sovereign Currency Act of 2018 introducing a new blockchain based currency called the Sovereign (‘SOV’) as legal tender of the Marshall Islands for all debts, public charges, taxes and dues.
Earlier this year in January, the UAE Central Bank (UAECB) and the Saudi Arabian Monetary Authority (SAMA) announced Aber, a digital currency that will be used for financial settlements between the two countries.
Dubai, announced its own cryptocurrency in October 2017. Dubai’s very own CBDC, emCash, will be used as an official payment solution for government and non-government services in Dubai.
In Sweden Riksbank has been working on an e-Krona project as of early 2017, in response to many years of declining use of cash. Sweden is reportedly now ahead of its next stage, which is a pilot for a prepaid value, non-interest bearing and traceable e-Krona.
The Bank of Lithuania is planning to issue a Digital Collector Coin to test blockchain on a small scale, while also sponsoring a blockchain sandbox called LBChain.
The Eastern Caribbean Central Bank is looking at the long-term viability of a DLT-based Eastern Caribbean currency to support economic growth, payments system resilience and financial inclusion.
Another country that is testing a CBDC is the Bahamas. The International Monetary Fund (IMF) released details of its discussion with the Bahamas’ central bank in July, including work done on the country’s CBDC.
In Uruguay, the central bank completed a pilot program on a retail CBDC in April last year as part of a wider governmental financial inclusion program. The pilot began in November 2017 to issue, circulate and test an e-peso.
The Bank of Thailand (BOT) completed the second testing phase of its CBDC called Project Inthanon. Started in August last year, the first phase focused on developing a proof-of-concept decentralized Real-Time Gross Settlement system (RTGS) that uses a CBDC on a distributed ledger.
Why Central Banks Are Exploring CBDCs
A report released by the IMF in June, notes that central banks may issue CBDCs and the main reasons are: “lowering costs, increasing efficiency of monetary policy implementation, countering competition from cryptocurrencies, ensuring contestability of the payment market, and offering a risk-free payment instrument to the public.”
The International Monetary Fund’s (IMF) managing director, Christine Lagarde, commented on cryptocurrencies at the World Economic Forum’s Davos convention. The soon-to-be head of the European Central Bank told reporters that “cryptocurrencies are shaking the system.”
Do we actually need CBDC?
The demand for CBDC in any country will be greatly dependent by the use of cash.
Digital cash has two important benefits. One is a reduction in the cost of supplying cash to the public. Digital cash alleviates the expense of printing currency, maintaining its fitness, building vaults and storage depots, and distributing cash.
The other is user convenience. Certainly, there is not much improvement in convenience if a user has to travel to an ATM or bank branch weekly or biweekly to reload a digital cash card or a mobile phone. However, if central banks issue a digital cash card, POS terminals could be adjusted to accept it just like a bank debit card. Funds could be debited from a user’s bank deposit account for each transaction.
While using digital currency is more convenient than going to an ATM to get some money, CBDC still sounds like a debit card. The demand for CBDC will be weak in countries where the use of cash is already very low, because of existing alternatives (debit cards, electronic money, mobile phone payments).
What does the future hold?
A few weeks back, for the first time during his presidency, Donald Trump tweeted about Bitcoin and cryptocurrency, after Facebook launched Libra, its own form of money. We are seeing governments around the world react to the rise of cryptocurrency.
While introducing CBDC would have a huge and transformative effect on the banking industry, it’s not clear if the demand for CBDC and is there yet. A CBDC provides people with an alternative and safer means of storing money. But this also means reducing deposits with commercial banks. Competition for deposits may lead to higher deposit rates and drive new innovation that encourage saving and borrowing.
We welcome CBDC, but that doesn’t mean they will kill Bitcoin or other cryptocurrencies. A CBDC is nothing like a Bitcoin or any other cryptocurrency. It’s not a cryptocurrency, but digital money. The world needs a digital form of fiat money like CBDC, but it also meeds a private form of money, like Bitcoin, that is not controlled by a central organization. People should be able transact with each other, without someone being able to impose restrictions on what they can and cannot do with their money. Money is a language and freedom to transact, is just like freedom of speech.
Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Weekly Front Page each Monday and has no positions or commercial relationships with the companies or people mentioned and is not receiving compensation for this post.
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Interesting roundup of CBD initiatives around the world. A CBDC has the same inflationary characteristics as the underlying Fiat currency. The difference is simply that Exchange is done on Blockchain not via the Interbank FX market. That simple difference has profound implications for the $5 trillion a day FX market and the banks such as Deutsche Bank, UBS, Citigroup and HSBC that dominate the market.