World economies embrace benefits of digital currency

With more countries exploring digital currencies, traditional cash could soon become a thing of the past, writes Paul Budde.

CENTRAL BANKS across the world have been exploring the possibility of implementing a digital currency — Central Bank Digital Currencies (CBDC). A digital currency can provide a safer financial environment as it will enable individuals, private companies 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 of credit risk in payment systems.

This has resulted in several countries developing 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 is an overview of some of the international developments.

Australia using Distributed Ledger Technology

The Reserve Bank of Australia (RBA) has partnered with the Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys to explore CBDC using Distributed Ledger Technology (DLT). The RBA stated that the project will explore other features such as programmability and automation features of a tokenised CBDC and financial assets.

RBA Assistant Governor Michele Bullock said in a statement:

“We are aiming to explore the implications of a CBDC for efficiency, risk management and innovation in wholesale financial market transactions. We are pleased to be collaborating 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 Senate Select Committee on Australia as a Technology and Financial Centre looks favourably 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 where the price is designed to be pegged to a cryptocurrency, fiat money (such as the Aussie dollar), or to exchange-traded commodities (such as precious metals or industrial metals). They can be used to access other digital currencies.

A key benefit is that this avoids the expensive conversion of Australian dollars into U.S. dollars.

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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 a portion of paper cash in circulation. One of the purposes 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 fasten 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 multiple times. An outright ban on crypto mining was seen as a massive setback for the industry.

USA — pilot programmes

The USA has launched several CBDC pilot programmes. After China announced its own digital currency, the U.S. Federal Reserve is now planning its own digital dollar prototype.

Two prototypes of the digital dollar are now being developed by officials at the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology (MIT).

However, there are still several issues that need to be addressed by the Federal Reserve, Treasury and Congress for this project.

They include:

  • if the Federal Reserve Bank should host customer accounts;
  • whether or not to allow anonymity; and
  • cyberattack consumer protection/transaction errors.
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European Central Bank

A paper was published on CBDCs, exploring how they could be designed for payments and discourage store of value. It suggests a two-tier system (first tier is payments, second tier is store of value). The main driver behind CBDC is efficient retail payments, which rejects CBDC as a store value.

UK — engaging with stakeholders

The Bank of England is exploring the possibility of a digital currency. It intends on engaging with stakeholders on the benefits, risks and practicalities of introducing a CBDC.

The country also changed its VAT laws (GST) to exclude digital currencies from taxation as a commodity.

Japan — seeking input from the broader community

This country launched Central Bank Digital Currency testing last year. The first phase consists of bank focused experiments on the basic function of CBDCs such as payment tools, issuance and distribution. The overall goal is to test the technical feasibility of the core functions that a CBDC would require. They will only move forward with feedback from the Japanese public

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Russia — push back from regulator

The Central Bank of Russia (CBR) aims to launch the digital ruble prototype this year. It mentioned that a digital ruble gained 83 per cent approval. However, the CBR received backlash from Russian regulators and local financial industry players due to its centralisation.

The aim is to launch a bank pilot system for testing and public feedback. Last week, the Government signed a roadmap to regulate crypto operations, signifying risks for the Russian financial market.

Other countries trialling bitcoin include:

  • Senegal — its digital currency, eCFA, was launched in 2016;
  • Singapore — it is involved in a research programme called Project Ubin;
  • Venezuela — launched its cryptocurrency, Petro, but so far it has little use;
  • UAE and Saudi Arabia — through Project Aber, they are testing digital cross border payments;
  • Germany — developing technology allowing to buy and sell securities on the blockchain and in exchange receive central bank money;
  • Sweden — concluded the first phase for a Central Bank Digital Currency called e-krona;
  • Canada — the Bank of Canada is working towards replacing cash with public CBDCs; and
  • Israel — concluded it should not issue a CBDC but should monitor the topic.

Key countries where crypto mining takes place include the U.S., Kazakhstan, Russia, Canada, Malaysia and Iran.

That cryptocurrencies are not just a situation of plain sailing became clear again this month when the market collapsed. This is mainly affecting those people who trade in the currency — you could call them gamblers.

However, the underlying trend for cryptocurrency remains solid. The collapse shows that for the currency to become more widely accepted, better regulations need to be put in place. Something that will sort itself out over time.

Paul Budde is an Independent Australia columnist 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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