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  • In 1694 the Bank of England became the first public bank to regularly issue banknotes

  • as an alternative to coins, as a means of payment.

  • Three centuries later, it's primarily tasked with maintaining price stability,

  • much like any other central bank across the world.

  • But these cautious institutions are now buzzing with talk of a revolutionary concept,

  • a form of money you cannot see: central bank digital currencies.

  • When you ask central banks around the world whether they are exploring CBDC,

  • one year ago the answer was 80% of them were exploring, and now it's nearly 90%.

  • Last year, 40% were experimenting and now it's 60%.

  • The vast majority of central banks are exploring CBDC.

  • The idea of digital money is not new. Many of us use debit and credit cards

  • or payments apps for transactions, but what would make a central bank digital currency different?

  • One of the big financial developments over the last few years has been the rise in popularity of cryptocurrencies,

  • with one in particular, bitcoin, standing out.

  • Following Tesla's announcement that it bought $1.5 billion worth of bitcoin in February 2021,

  • the volatile cryptocurrency's price surged to new highs, giving it a theoretical market capitalization

  • that is even larger than the world's two largest payments processing companies: Visa and MasterCard.

  • Unlike traditional money, cryptocurrencies are not issued by a central bank,

  • but rather via a decentralized network of computers, typically using blockchain technology.

  • Even Facebook is trying to get in on the act with the 2019 announcement that it would develop its own digital currency,

  • known at the time as Libra and now rebadged as Diem.

  • And so at that point central bankers started to realize they were really under some threat.

  • And the question became, if we can't beat them, do we join them?

  • Investors in bitcoin believe that because there is a theoretical cap on the number of bitcoins that can ever be mined,

  • the cryptocurrency will become increasingly valuable at a time when central banks have been

  • printing more money than ever before to arrest the economic fallout from the pandemic.

  • That's why people sometimes call bitcoin 'digital gold'.

  • Many central banks are worried that the widespread adoption

  • of these independent cryptocurrencies could weaken their control over the financial system.

  • This could cause financial instability, especially because cryptocurrencies do not have

  • the legal or the regulatory safeguards that central bank money does. So why not issue a digital currency of their own?

  • Currently, regular bank deposits, cash and cryptocurrencies issued by the private sector,

  • such as Diem and Bitcoin, all have a few features that make them useful,

  • but the hope is that publicly available CBDCs would have all these desirable characteristics.

  • Unlike your savings in a commercial bank, which rely on the bank's promise to fulfill,

  • CBDCs are recognized by law and backed by the power of the central bank, which cannot go bankrupt.

  • For example, if a commercial bank collapses, part of your savings could potentially be wiped out.

  • But this wouldn't be the case for CBDCs, which could be as trusted as cash, as convenient as a payment app,

  • yet also benefit from the same blockchain technology which underpins cryptocurrencies.

  • And just like cash, CBDCs could be distributed through commercial banks, avoiding too much disruption to the financial system

  • or the central bank having to deal directly with many millions of citizens and businesses.

  • Think of bank notes, which are the closest equivalent to central bank digital currencies that we have today.

  • Except that they are on paper, of course. This is money that is issued by the central bank

  • and used daily in retail payments. The central bank sells bank notes to the commercial banks,

  • and then the commercial banks distribute bank notes through ATMs to their clients.

  • This means that everyone could have access to this digital currency, which could bring a lot of benefits.

  • It could make payments faster, allowing for immediate settlements

  • and no processing delays. And it could also make payments cheaper.

  • In the U.S., the aggregate cost of making retail payments ranges from 0.5% to 0.9% of GDP.

  • Digital currencies would reduce those costs.

  • It also means that more people could have access to electronic payments.

  • Currently, over 1.5 billion adults across the globe don't have access to the financial system

  • and even in an advanced economy such as the U.S., more than 6% of Americans don't have a bank account.

  • Issuing digital currencies could also make it easier for governments to deliver stimulus checks,

  • or even go one step further and make targeted payments to those deemed most in need.

  • So how soon could central bank digital currencies become a reality?

  • China is the major economy which is most advanced in its CBDC development.

  • The People's Bank of China has been running tests of its digital currency since April 2020

  • with the help of four banks in the country. Tens of thousands of consumers have already

  • been involved with the pilot, spending two billion yuan in over four million transactions.

  • For China, it could also be a means of re-asserting control over a financial system

  • challenged by the rapid growth of fintech companies

  • Ant Pay and WeChat, these are the dominant payment technologies in China,

  • and they are in the hands of Alibaba and Tencent, and if Beijing can wrest that back then I think they will.

  • And the way that it's set up, the e-yuan, is that it will still be effectively very integrated

  • with the commercial banks but it is effectively a direct challenge to the payment technologies,

  • they are trying to ultimately displace them. The e-yuan's going to have its own digital wallet

  • at the commercial bank and over time people will probably just find it more convenient

  • to use that, and thereby displacing Ant Pay, for example.

  • There may also be a geopolitical consideration for China, providing a mechanism to shift away from using the U.S. dollar.

  • There is no doubt that Beijing views the U.S. dollar as a strategic advantage the U.S. has.

  • The problem is that most of the trade, the real world trade, is denominated and invoiced in U.S. dollars, right,

  • and China sees this and it's hard for them to sort of push renminbi into the global financial system,

  • the global trading system, but they're trying.

  • But if they had a digital currency that would be potentially a really fascinating angle.

  • So you can see, if it has got a technological advantage, that perhaps this is a way for people to think

  • about the renminbi in a different way and perhaps, you know, ultimately start to chip away at hegemonic status of the dollar.

  • But it's not just China.

  • The European Central Bank has plans for a digital euro, although it may be a few years before it is available.

  • We are going to have to address all the issues of anti-money laundering, financing of terrorism,

  • privacy of users and all their information, the appropriate technology that will carry that digital currency,

  • and this is, you know, a project that could probably take us, two, three, four years before it is launched.

  • This has got people wondering whether issuing a central bank digital currency

  • could interfere with the effectiveness of monetary policy.

  • Central banks have addressed CBDCs so far, really as part of a payments discussion.

  • That's a discussion for monetary policy committees, for the ECB governing council,

  • whether they want to use CBDC or not, but it's too early to have that discussion.

  • But theoretically if the central bank wanted, they could also pass on negative rates

  • to the holders of central bank digital currencies?

  • Think of CBDC as being the future of bank notes, bank notes do not bear interest.

  • And so, if you follow that line of reasoning then CBDC should not bear interest.

  • And if you want CBDC to bear interest then you're creating something different.

  • A lot depends on how much people would use CBDCs, and no central bank wants them

  • to completely replace traditional cash, but rather to compliment it.

  • One risk associated with CBDCs is that in an extreme situation, such as after a financial crash,

  • you could see people withdrawing their deposits from commercial banks

  • and opting to store their money in digital currencies backed by the central bank.

  • Trouble would be if CBDC would replace bank deposits in a large amount

  • because then what happens is that savers could shift their savings from bank account to CBDC.

  • Then banks could have a problem for funding. This might have an effect on the financing of whole economy.

  • People can shift saving from bank account to CBDC just with a click. This would be very dangerous obviously.

  • As we move towards a more cashless society, will central bank digital currencies ever become

  • as trusted and as convenient as bank notes? Quite possibly, though it may take months, maybe even years.

  • The trust in private money is built on the trust in the currency

  • and the fact that behind that there is a central bank which has tools to keep the value of the currency.

  • We have to buy this trust and that's why we need to stay in the economy

  • and the way to stay in the economy is to make sure people trust us.

  • Thank you for watching. Would you ever use a central bank digital currency?

  • Let us know in the comments, and don't forget to subscribe.

In 1694 the Bank of England became the first public bank to regularly issue banknotes

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Why central banks want to launch digital currencies | CNBC Reports

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    Summer posted on 2021/02/12
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