The anticipation was great when Jerome Powell, the Chair of the United States Federal Reserve, finally addressed the government’s position on digital currency and the potential role of a central bank digital currency (CBDC) for domestic and international cross-border payments, on Oct. 19.
In his address, he focused on the benefits and possible risks digital currencies may bring, in addition to the implications they will have on policy. This came after Facebook’s projected launch of Libra, its permissionless blockchain based payment system, which Powell labeled as a “wake-up call.”
The United States
One of the concerns some have is if the advent of a national digital currency will become a means to end privacy by giving banks surveillance capabilities along with cold hard fiat, or will it merely function as an extension of it?
Powell affirmed that the latter is true, explaining that if any digital currency would be set in circulation, it would be intended as a “complement” and not a means to replace traditional currency.
Another concern is if China’s digital yuan will threaten the value of the U.S. dollar as the world’s dominant reserve currency, as well as impact the euro. This concern is not underrated, not when the international economic implications of a transition of this caliber could alter the current reserve status.
National digital currency is designed to be the digital equivalent of paper money. Similar to cryptocurrency it is typically based on blockchain or some comparable form of a distributed ledger. Presently, the largest banks in the world, including several smaller banks, favor the idea of circulating digital money.
In fact, there are seven central banks that have demonstrated interest in the possible development of a CBDC. This list includes the Federal Reserve, European Central Bank (ECB), the Bank of Japan, the Bank of England, Bank of Canada, Sveriges Riksbank, and the Swiss National Bank.
When some of the foreseeable risks to a CBDC are considered, Powell expressed the government’s need to protect a CBDC from cyber threat actors, since a digital monetary system of this nature would need to be engineered to withstand cyber attacks and the threat of fraudulent use, in addition to the possibility of counterfeiting.
Powell further stressed that privacy was also a concern as well as thoughts on how the presence of a digital currency might alter current policy and possibly disturb monetary stability. A CBDC must not only provide a layer of security, but also be able to prevent illegal activity, he explained.
While the reality of this idea is growing rapidly as anticipation soars, and as most projects are still in the early stages of development, central banking institutions have drastically begun pursuing this project for the past year, ever since Facebook announced their intention to develop Libra.
The idea was going to revolutionize digital payments, with the ability to present this new payment platform to reach 2.7 billion active users, with 1.7 billion people in countries, where banking systems are underrepresented and their services insufficient. When governments, banks, and regulators learned of Facebook’s bold move, they expressed fear that Libra could disrupt the traditional financial system.
Because digital transactions significantly increased during the pandemic, the government apparently fears that it will lose control of their CBDC, if privatized currencies like Libra become the industry standard people will use and supplant the CBDC. Benoit Coeure, a former board member of the ECB, issued a warning last year, saying that digital currencies such as Libra “could challenge the supremacy of the U.S. dollar.”
In the meantime, October alone saw a slew of developments in regard to central bank digital currencies around the world.
In recent news, the government in Shenzhen China made a bold move when it conducted a public test in the form of a lottery, giving away a value of 10 million yuan (around $1.5 million, at the time) in digital currency.
The new digital yuan was disbursed through the country’s central banking system, the People’s Bank of China (PBoC). China is apparently taking this initiative very seriously, as it leaps forward with the plan to become the first cashless society, according to a report released in October.
Unlike other central banks, the PBoC aims to adopt a retail CBDC, with commercial banks collaborating in an essential capacity. In fact, four major commercial banking institutions — who also joined forces with mainstream telecommunications companies — have combined forces to collaborate in pilot projects like the digital currency electronic payments project in Shenzhen.
In an effort to avoid the use of intermediaries, banks will be elevated to CBDC agents, and a CBDC will be the preferred method to reload funds at banks, perform bank transactions, payments, and will ultimately bring businesses to banks, while at the same time giving leverage to the CBDC to compete with other digital monetary platforms.
As agents, banks will reportedly be capable of monitoring account activities and have data collecting capabilities, ensuring absolute traceability. In other words, a digital currency of this kind could be thought of as having “controllable anonymity.”
The Bahamas and the “Sand Dollar”
On Oct. 20, the first central bank digital currency was launched. The Central Bank of the Bahamas rolled out the “Sand Dollar,” which is being introduced in slow incremental installments, starting with collaborating with private banking institutions.
“Sand Dollar is available nationwide. Become Sand Dollar enabled today. Contact these Central Bank of the Bahamas supervised, authorised financial institutions for details,” said the central bank, notifying close to 400,000 residents scattered across 700 coral islands about the deployment of the country’s new central bank digital currency.
This ostensibly makes the Commonwealth of the Bahamas the very first country to issue a central bank-backed digital currency.
For example, during the course of this initial installment, private institutions will be required to have their operations ready and be in compliance with know-your-customer (KYC) policies. During this stage, digital wallets created in private institutions will be optimized with layered degrees of KYC and regulations.
As reported, although Sand Dollar transactions will not retain the benefit of anonymity like traditional hard currency, it will be protected by standards such as encryption — which, in effect, makes the Sand Dollar a cryptocurrency, in a manner of speaking.
The Reserve Bank of New Zealand (RBNZ) seems to be seriously considering implementing a CBDC as the technology continues to be a hot topic of debate and interest worldwide.
Christian Hawkesby, the assistant governor and general manager of the economics, financial markets, and banking group at the RBNZ, shed significant light in a speech for the Royal Numismatic Society of New Zealand, in October, explaining New Zealand’s perspective on a CBDC.
He explained that cash is being handled less and less as a means of payment. Consequently, accessibility to cash is fading away, given the fact that the majority of money balances in New Zealand are being represented digitally, and banknotes only make up 7 per cent to 9 per cent of liquid currency.
Hawkesby emphasized that New Zealand had “no immediate plans to launch a CBDC in New Zealand,” apparently meaning that the country most likely will not be implementing a CBDC at this time. However, he did indicate in his speech that action is being considered as the RBNZ is carefully following developments and is “among the 80 per cent of central banks that are actively researching CBDCs.”
Australian central bank similarly isn’t jumping on the CBDC bandwagon just yet. Tony Richards, the payments policy chief at the Reserve Bank of Australia (RBA), explained in a speech at the UWA Blockchain and Cryptocurrency Conference, on Oct. 14, that “the Bank’s view is that no strong public policy case has yet emerged for the introduction of a CBDC for general use.”
According to Richards, the payment network in Australia is already prosperous and serves the needs of everyday people and corporations. That is why the RBA does not foresee a retail CBDC being able to provide any serious enhancement to the existing settlement infrastructure that is already sufficient.
The Bank of Korea (BOK) has plans to launch an experimental CBDC, a digital won, distribution test in 2021. The distribution test serves as the final stage of a three tiered development, with the first stage being the design and auditing of the base-layer technology, which was concluded in July.
Before the distribution test takes place, the BOK will reportedly evaluate the processes involved in the machinations of the CBDC infrastructure and will likely bring in the efforts of outside specialists. Earlier this year, the Bank of Korea put together a six-person CBDC panel consisting of industry members from the finance, commercial law, fintech, and IT industries.
The development of national digital currencies remains a hot topic. Raul Pal, the founder and CEO of Global Marco Investor and Real Vision Group, said on Oct. 18, on his Twitter feed that “if you don’t think central bank digital currencies are coming, you are missing the big and important picture. This is going to be the biggest overhaul of the global financial system since Bretton Woods.”
Anthony Pompliano, a co-founder of the hedge fund and global investment company Morgan Creek Digital, stipulated on Twitter: “Central banks want central bank digital currencies. The people already have Bitcoin. The first has unlimited supply and the second has a capped supply. Not hard to guess where capital will flow over time.”