The dwindling cash consumption is pushing the central banks


LONDON – Central banks are accelerating their work on digital currencies and investors are taking note.

Earlier this year, the Bank for International Settlements released its latest survey, which found that 86% of the 65 central banks it has spoken to are working on Central Bank Digital Currencies (CBDCs) in some form, be it research, proofs of concept or pilot development.

Almost 15% are moving towards actual research for pilots.

What inspired this activity?

Deputy Governor of the Bank of Italy Piero Cipollone told CNBC that the increased focus on CBDCs was due to the general move away from cash, adding that “this could undermine one of the central bank’s core functions”.

He added that “in an environment where cash is being used less and less by both the customer and the merchant as the whole ecosystem is shifting towards (digitization) … you want to replace the functionality of cash with something that is digital, but as conceptually as close as possible to cash. ”

Benoit Coeure, former member of the European Central Bank and now head of the BIS Innovation Center, shares this view, telling CNBC that we should view CBDC as a form of banknote, adding that it is a “means to get away with spent To bring money. ” Central banks to new modern infrastructure. “

The dwindling cash usage may not be the only reason, however.

Grant Wilson, head of Asia Pacific at strategy firm Exante Data, told CNBC that much of the research on CBDCs accelerated when Facebook began to get involved in a stable coinage project called Libra (now known as Diem), which could potentially be have systemic effects on the financial system. ”

He explained, “It was at this point that central bankers began to realize they were facing a threat. The question was, if we can’t beat them, join them. It was very clear after the Libra was proclaimed.”

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What are the advantages?

Central bank digital currencies would benefit from much of the same technology found in private cryptocurrencies, enabling instant payments, faster settlements and lower transaction costs, especially for cross-border payments.

They could also be a means of ensuring financial inclusion and tapping into sections of the population that do not have banks. Unlike private cryptocurrencies, however, CBDCs would be centralized and each unit of digital currency would have the same value as a unit of cash.

There is no consensus on how CBDCs are issued. The two main forms under study are wholesale (CBDC, issued only to financial institutions and for the financial architecture) or retail, digital currencies available to the public.

Much like the way central bank cash is printed and distributed through the commercial banking system, one of the common methods of issuing CBDCs is through a “two tier” system where the central bank issues a token that is distributed to commercial banks. Each transaction would be recorded in a central bank digital ledger, but the money would be stored in a commercial bank in a digital wallet unique to each user.

One of the concerns is that the surge in CBDCs could inadvertently lead to a bank run if users decide to leave bank deposits (which are held liable by the commercial bank) to the relative safety of a currency issued by the central bank.

According to Cipollone, one way to avoid this is to keep the interest of the CBDCs above a certain threshold. In theory, this also means that central banks could pass negative interest rates on to consumers more directly, rather than having to go through commercial banks.

Commentators were quick to suggest that the advent of CBDCs could have an impact on monetary policy. Coeure warns, however, that “the central banks have so far addressed this in the context of the payments discussion”.

“The monetary discussion will come at some point. We are still in the early stages of the technical requirements / resilience to be operational,” he told CNBC.

China is the furthest advanced in CBDC development after piloting a form of the e-yuan in 2020. However, the motivations there could be different.

Wilson notes that “the e-yuan will continue to be integrated into commercial banks, but it is a direct challenge to technologies (like WeChat Pay and Alipay) that are ultimately trying to oust them,” and notes that their geopolitical dimension Motivation plays a role.

“Perhaps this is a way for people to see the yuan differently and destroy the hegemony of the dollar,” he said.

Coeure said coordination between central banks is essential. “CBDCs are a national project, a journey with legal dimensions, and will ultimately be a national choice. But we have an international monetary system and we don’t want CBDCs to hinder the adjustment of the system through free exchange rates or capital flows,” he said, and came concluded that “the IMF and the BIS are working on it”.