Thursday, December 7, 2017

Lots of Studying by Central Banks on Digital Currencies

We have noted here that at some point next year we could see the first central bank digital currency show up. This won't be surprising since this topic is being studied all around the world by central banks and the IMF and BIS are also watching the space.

Below are links that will give you some examples of how pervasive this topic is in the world of central banking even as central banks have not yet made any actual significant change that might impact the global monetary system. In just one article, Bloomberg takes us on a tour around the globe to see how the major central banks view both Bitcoin and distributed ledger technolgy (see link below).


Bank for International Settlements (BIS) - Central Bank Cryptocurrencies

"New cryptocurrencies are emerging almost daily, and many interested parties are wondering whether central banks should issue their own versions. But what might central bank cryptocurrencies (CBCCs) look like and would they be useful? This feature provides a taxonomy of money that identifies two types of CBCC - retail and wholesale - and differentiates them from other forms of central bank money such as cash and reserves. It discusses the different characteristics of CBCCs and compares them with existing payment options."

IMF - Central Banking and Fintech - Brave New World?

"Instead, citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash—no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities. If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender."

Bloomberg - Here is What the World's Central Banks Think about Bitcoin

"The guardians of the global economy have two sets of issues to address. First is what to do, if anything, about emergence and growth of the private cryptocurrencies that are grabbing more and more attention -- with bitcoin now surging toward $10,000. The second question is whether to issue official versions."

Conclusion: It is hard to tell how quickly we might see central bank digital currencies show up. My guess is that Singapore, China, and Russia are the most likely places to see it first. There are still questions to be resolved for any central bank studying the idea:

- Will individual citizens be able to open central bank accounts to hold digital currencies?

- If so, how would that impact the private commercial banks?

- Would a central bank use a distributed ledger to support a digital currency or not?

- Will a new standard ledger technology emerge that all or most banks and central banks adopt to use with digital currencies?

These are just some of the questions being considered. Some even say that central banks should stay away from digital currencies and blockchain technology completely. 

Until we see some actual central banks adopt a new version of their currency (the so called central bank digital currency), we just won't know how quickly this might spread around the world. Someone has to stick their toes in the water and test things out first. Who will it be?
Added note: US Fed Vice Chair Randal Quarles addressed the issue of both cryptocurrencies (private and official) and distributed ledger technology in this recent article carried on Banking The points he makes in this article align almost perfectly with what we have reported here. Central banks are studying, testing, etc. But the process does not move quickly and they are very cautious about making changes.

Below are a couple of excerpts from the article:

. . . . .
"The challenge, as explained by Quarles, is for new payments mechanisms to achieve necessary scale while controlling financial and technical risks.

“Not surprisingly,” said Quarles, “because striking the right balance takes time, genuine innovation in payment systems over history has often been measured in decades, not years.” Quarles referred to banking and payments industry efforts, notably those aimed towards building a faster payments system that have been moving forward with Federal Reserve System cooperation."
. . . . .
"Quarles acknowledged that some have suggested that the stability issue could be addressed by having central banks issue their own digital currencies. Several years ago an informal and unofficial concept of a “Fedcoin” was floated in a Fed bank blog as a subject for discussion. More recently, some experimentation has occurred overseas, such as a pilot effort by the Monetary Authority of Singapore, that nation’s central bank.

Quarles struck a very cautious note here—he used the word “caution” or forms of it frequently in the speech.
For a nation like the U.S. with an extensive banking system and much demand still for physical cash to venture into virtual money would require intensive review of legal and risk issues, Quarles said.
“I am particularly concerned that a central-bank-issued digital currency that’s held widely around the globe could be the subject of serious cyberattacks,” said Quarles, “and could be widely used in money laundering and terrorist financing.”
Quarles suggested that any such efforts to develop central bank digital currency would be a distraction from—they “might even derail”—efforts to improve U.S. retail payments. He pointed out that the U.S. still lacks a widescale system for banks and their customers to make instant and convenient transfers and settlements 24/7."

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