As more countries explore digital currencies, traditional cash may soon be a thing of the past, writes Paul Budde.
CENTRAL BANKS around the world have explored the possibility of implementing a digital currency – Central Bank Digital Currencies (CBDC). A digital currency can provide a safer financial environment as it will allow individuals, private businesses and several financial institutions to settle directly in central bank money rather than through bank deposits.
Therefore, through digital currencies, there will be a reduction in liquidity concentration as well as a reduction in credit risk in payment systems.
This has led several countries to develop their own digital currency while other countries are in the process of or are exploring/have explored the possibility of implementing a digital currency.
Here’s a look at some of the international developments.
Australia uses distributed ledger technology
The Reserve Bank of Australia (RBA) has partnered with Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys to explore CBDC using Distributed Ledger (DLT) technology. The RBA said the project will explore other features such as programmability and automation features of a tokenized CBDC and financial assets.
RBA Deputy Governor Michele Bullock said in a statement:
“We aim to explore the implications of a CBDC for efficiency, risk management and innovation in wholesale financial market transactions. We are pleased to work with industry partners to explore if there is a future role for a wholesale CBDC in the Australian payments system.
A report published last October by the Special Senate Committee on Australia as a Technology and Financial Center looks favorably on cryptocurrencies.
Another interesting development is that ANZ has become the first bank to mint an Australian dollar stablecoin – the A$DC. Stablecoins – based on blockchain technology – are cryptocurrencies whose price is designed to be pegged to cryptocurrency, fiat currency (like the Australian dollar) or exchange-traded commodities (like precious metals or industrial metals). They can be used to access other digital currencies.
A key advantage is that it avoids the costly conversion of Australian dollars to US dollars.
China — digital yuan
The People’s Bank of China has developed the digital yuan, which is a central bank digital currency that aims to replace some of the paper money in circulation. One of the goals of the digital yuan is to increase competition in China’s mobile payments market, which is currently dominated by Alipay and WeChat Pay.
China is already very advanced in cashless payments and the digital yuan will speed up the process. It was also announced that the digital currency will be legal tender and no interest will be paid on it.
It has banned cryptocurrency trading on several occasions. An outright ban on crypto mining was seen as a massive setback for the industry.
United States — pilot programs
The United States has launched several CBDC pilot programs. After China announced its own digital currency, the US Federal Reserve is now planning its own prototype digital dollar.
Two prototypes of the digital dollar are currently being developed by officials at the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology (MIT).
However, several issues still need to be resolved by the Federal Reserve, Treasury and Congress for this project.
- whether the Federal Reserve Bank should host customer accounts;
- whether or not to allow anonymity; and
- cyberattacks consumer protection/transaction errors.
European Central Bank
An article was published on CBDCs, exploring how they could be designed for payments and discourage the store of value. He suggests a two-tier system (first tier is payments, second tier is store of value). The primary driver of CBDC is retail payment efficiency, which dismisses CBDC as store value.
United Kingdom — dialogue with stakeholders
The Bank of England is investigating the possibility of a digital currency. He intends to engage with stakeholders on the benefits, risks and practicalities of introducing a CBDC.
The country has also amended its VAT (GST) laws to exclude digital currencies from taxation as a commodity.
Japan – soliciting feedback from the wider community
This country launched the Central Bank’s digital currency test last year. The first phase consists of bank-focused experiments on the core function of CBDCs such as payment tools, issuance, and distribution. The overall objective is to test the technical feasibility of the basic functions that a CBDC would need. They will only move forward with feedback from the Japanese public.
Russia – push back the regulator
The Central Bank of Russia (CBR) aims to launch the prototype digital ruble this year. He mentioned that a digital ruble got 83% approval. However, the CBR has received backlash from Russian regulators and local financial industry players due to its centralization.
The goal is to launch a pilot banking system for testing and public comment. Last week, the government signed a roadmap to regulate crypto operations, which means risks for the Russian financial market.
Other countries testing bitcoin include:
- Senegal — its digital currency, eCFA, was launched in 2016;
- Singapore – he is involved in a research program called Project Ubin;
- Venezuela – launched its cryptocurrency, Petro, but so far it has little use;
- United Arab Emirates and Saudi Arabia — through Project Aber, they are testing digital cross-border payments;
- Germany — development of technology to buy and sell securities on the blockchain and receive money from the central bank in exchange;
- Sweden – concluded the first phase of a central bank digital currency called e-krona;
- Canada — the Bank of Canada is working to replace cash with public CBDCs; and
- Israel – concluded that it should not issue CBDCs but should monitor the topic.
The main countries where crypto mining takes place are the United States, Kazakhstan, Russia, Canada, Malaysia, and Iran.
The fact that cryptocurrencies are not just a simple navigational situation became clear this month when the market crashed. This mainly affects the people who trade the currency – you might call them gamblers.
However, the underlying trend for the cryptocurrency remains strong. The collapse shows that for the currency to gain wider acceptance, better regulations need to be put in place. Something that will improve over time.
Paul Budde is a freelance columnist in Australia and Managing Director of Paul Budde Consulting, an independent telecommunications research and consultancy organisation. You can follow Paul on Twitter @PaulBudde.
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