What is central bank digital currency?

The Central Bank Digital Currency (CBDC) is trying to bring some of the so-called advantages of private digital currencies into the world of public currencies with the support of the central bank of the country. This also means that, in theory, CBDC is safe during the financial crisis.

Often compared with cryptocurrencies, because some Proposed CBDC The same blockchain technology can be used. However, this is not necessarily the case. In fact, unlike the most famous blockchain-the blockchain used by Bitcoin-which is essentially a decentralized database, the central bank may control its own private blockchain in most cases.

How far has the plan progressed?

Although there are few fully developed and deployed CBDCs, there are several countries whose initiatives are at an advanced stage. in China, Yiyuan CBDC It is one of the most advanced countries in large economies. In February, the government issued a Chinese New Year “red envelope” containing digital coins to encourage people to accept it.

One of the few countries that have fully deployed CBDC is the Bahamas. Sand money As a collaboration between the Central Bank, the payment card group MasterCard and the digital payment platform Island Pay, it was piloted in 2019 and started normally one year later.

Other major European economies and North America It is still in the exploratory stage. In the United Kingdom, the Bank of England and the Ministry of Finance announced the establishment of a CBDC working group to coordinate research on potential “British currency”, but has not yet proposed any specific findings. In the United States, Federal Reserve Chairman Jerome Powell said in September that the central bank will “soon” release a study on the costs and benefits of deploying CBDC. Cryptocurrency has become an increasingly polarizing topic in the United States, and Fed officials have reported similar disagreements on the idea of ??a public digital currency.

Why should the government try to create a CBDC?

The driving force of CBDC in Western countries is at least partially inspired by two potential challenges-the first is the concern about private companies surpassing the power of regulators, and the second is geopolitical issues.

Stablecoin Currency linked to the U.S. dollar has been widely adopted in the past year. The face value of their coins in circulation has risen from less than 30 billion U.S. dollars to approximately 140 billion U.S. dollars. Although most of them remain in the cryptocurrency ecosystem, more and more people are striving to use stablecoins for fast and cheap transfers.

newMeta’s (formerly Facebook) digital wallet is trialling the pax Dollar stablecoin for transfers, including remittances in Guatemala and parts of the United States. (Meta’s own stablecoin diem has not yet been launched-concerns about coins owned and operated by social networks have always been at the core of stablecoin regulation.)

Regulators have expressed concerns about private stablecoins in a number of ways, including the challenges they may pose to financial stability and the effectiveness of monetary policy, as well as consumer welfare. Some people believe that an effective CBDC may reduce consumers’ reliance on stablecoins, or at least provide retailers with greater protection.

There are also concerns about China’s electronic meta project, which is one of the more advanced CBDC plans. Beijing’s goal is to expand the system before the Beijing Winter Olympics in February. Critics in the United States expressed concern that its deployment would enable the Chinese government to prevent shoppers from using coins in stores that violated its policies and allow large-scale surveillance.

CBDC supporter It is said that they provide benefits normally attributed to stablecoins, including lower costs and faster payment settlements than existing systems in some parts of the world. They also discussed their ability to implement monetary policy more effectively, such as providing economic stimulus after the financial crisis.

What are the risks?

One concern surrounding CBDC is the potential impact on traditional retail banks. If consumers are able to obtain liquid cash fully supported by the central bank, then CBDC may become a safe haven for economic instability, thereby withdrawing cash from the bank and possibly leading to a bank run.

Similar to the concerns about Beijing’s control of electronic yuan, there is also controversy surrounding the ethics of “programmable currency”. If the central bank has the ability to effectively control consumer spending, this may undermine basic rights and free choice.

Finally, long-standing concerns about financial inclusion only increased during the pandemic, as efforts to digitize currencies have been strengthened. CBDC may be beyond the reach of those who have old equipment or cannot use digital wallets, and care needs to be taken to avoid further depriving the elderly and vulnerable groups of their rights.