Government Supported Central Bank-Issued Digital Currencies: Now or Never?

There has been series of condemnations on central bank-supported digital currencies (CBDC). Recent among this is that of the Bank of Japan’s (BOJ) deputy governor, Masayoshi Amamiya on October 20 reiterating his pessimistic views towards CBDC under the claim that digital assets do not have anything good to add to the existing monetary systems.

Looking around, the idea of CBDC popularly regarded as national cryptocurrencies is being deployed by governments all over the world, especially in countries ravaged by hyperinflation.

Some of this governments have launched their virtual currencies while some are still researching the economic prospects of cryptocurrency.

Country like Japan have decided to let the idea go untapped. To this end, below are what you need to know about the concept. Also it talks about why governments are implementing or denying the idea.

What’s a CBDC?

National digital currencies otherwise called CBDCs are digital currencies that are controlled and issued by government regulatory agency. In this wise, they are completely controlled and regulated by the state.

Unlike other cryptocurrencies, note that CBDCs are not fully decentralized but they are more like fiat money that are in digital form.

In the same wise, the central bank that offers national currencies are not only the currencies’ regulator but they also hold their client’s clients’ account as well.

Every CBDC unit serves as a secured digital equivalent of a paper bill, also, they are usually managed and powered by the distributed ledger technology (DLT). It could be said that CBDCs are central banks’ response to the continuously growing cryptocurrencies that are always not been regulated by government.

Why CBDC When Blockchain is as Useful as CDs? –Switzerland

While people see Switzerland as the most blockchain and crypto friendly country in Europe, the country does not stop disparaging the importance of CBDCs.

Around June, board director of the Swiss National Bank (SNB), Thomas Moser, maintained that blockchain and digital assets are innovative enough to think of dishing out a state-supported cryptocurrencies

In a conversation at the Crypto Valley blockchain conference in Zug Moser pitched blockchain with the “useless innovation” of Compact Discs (CDs), stating that digital currencies are ordinary imitation of the preexisting products like “digital shares, bonds, vouchers”.

He said: “Something similar has to happen with Bitcoin. People will only switch to something new if it works better or is cheaper.”

Shortly afterward, Business Insider reported Moser to have said that even though central banks initially had the interest of supporting CBDCs, “enthusiasm has slowed again because of the implications it would have for financial stability.”

In the past, Switzerland indicated they were interested in issuing CBDC and gave it a potential name “e-franc”.

In May, Switzerland’s Federal Council of the Government demanded a report on the opportunities and risks involved in introducing a government-supported cryptocurrency.

The decision to support the prosed national digital currency first came into limelight in February and was first mentioned by Romeo Lacher, chairman of the Swiss stock exchange SIX, pointing that “an e-franc under the control of the central bank would create a lot of synergies — so it would be good for the economy.”

China says CBDC is ‘Technologically Inevitable’

For some time now, the People’s Bank of China (PBoC) has been making findings on the CBDC idea. At the moment, a competent research institute tagged Digital Currency Research Lab was founded purposely for this reason.

In September, PBoC increased the research activity of the cryptocurrency research lab beyond the country’s capital with a center opened in Nanjing, indicating that a Chinese national digital currency is in the offing.

In the same line, PBoC opened commissioned four crypto professionals who are saddled with the responsibility of developing a chip processor and a secure data base that will give room for seamless crypto transactions.

In March, governor of the PBoC, Zhou Xiaochuan, showed the agency’s stand on the matter:

“If [blockchain technologies] spread too rapidly, it may have a big negative impact on consumers. It could also have some unpredictable effects on financial stability and monetary policy transmission.”

He also made known that cryptocurrencies have the potential to reduce cash circulation, pointing that the PBoC “must prevent substantial and irreparable damages” to the domestic economy. Nevertheless, according to China Daily, he also claimed that the development of digital currency is “technologically inevitable.”

Hong Kong researched on CBDCs and showed that it is ‘not superior to existing infrastructures’

Unlike China, Hong Kong appears to have a clear understanding and statement on CBDCs. In May, it stated in a press statement that it will not issue a CBDC, pointing that it has a standard payment infrastructure.

The announcement by Hong Kong was signed by Joseph Chan, the Acting Secretary for Financial Services and the Treasury in the Legislative Council.

He said the Committee on Payments and Market Infrastructures (CPMI), a body that comprises of the People’s Bank of China (PBoC), the Hong Kong Monetary Authority (HKMA), and the Markets Committee (MC) of the Bank for International Settlements together were studying opportunities and shortcomings of CBDC.

Their statement indicated that “currently proposed implementations of CBDC for wholesale payments look broadly similar to, and not clearly superior to, existing infrastructures.”

The report argued extensively on the benefits of CBDC, arguing that it may be reduced due to the existence of standard private retail payment products, that purposely makes CBDC “a subject which requires further study and more proof-of-concept work to ascertain its feasibility for payment applications.”

While Venezuela has a National Digital Coin, it still Begs for Some Answers

Around February 2018, the government of Venezuela announced a national coin referred to as the Petromoneda (Petro). The coin was first declared in December 2017 on a TV by the country’s president Nicolas Maduro, declaring that his administration intended to issue a cryptocurrency supported by the country’s oil, gold, and other mineral reserves.

However, in January, he went ahead on it pointing that 100 million petros supported by an equal number of barrels of oil were about to be issued.

The President said a number of fiat currencies i.e. Russian ruble, the Chinese yuan, Turkish lira, and the euro would be easily convertible with the Venezuelan Petro.

Mere looking at Petro, the digital currency cannot be referred as a CBDC since it is not issued by the local central bank and not the same with the problematic fiat currency, the Sovereign Bolivar.

An Ethereum core developer by the name Joey Zhou, said lately that the digital currency was plagiarized.

The aim of the digital currency is to make the country outsmart the sanction placed on Venezuela by the U.S.

Petro according to unverified information available has ties with Russia, and has been receiving backings from Russia since 2017.

In an allegation by the Russian state bank source informing The Times, “People close to Putin, they told him this is how to avoid the sanctions.”

There are allegations that the Venezuelan government is forcing Petro upon local citizens ahead of its public launch.

For example, Petro was just made the only legal spending that Venezuelans can pay their passport fees in, while also increasing the fees. Starting from October 8, a new passport costs 2 petros while an extension costs 1 petro.

Japan Opined that CBDCs would function only if there were no cash.

Japan is one major country where Bitcoin is recognized as a legal tender. Surprisingly, the country publicized that the idea of CBDC is not relevant. This has been said twice by the country.

On October 20, Bank of Japan (BoJ) Deputy Governor, Masayoshi Amamiya, showed is pessimism towards the effectiveness and efficiency of CBDC, stating that his agency will not be issuing cryptocurrency any time soon.

Notably, Amamiya said in response to a statement advising that CBDCs has great potential to help nations overcome the “zero lower bound”, a phenomenon where interest rates fall to zero and finds it hard to keep the economy going.

In theory, CBDC has the possibility of enabling central banks achieve economic balance by charging more interest on deposits from individuals and firms, while at the same time stimulating and motivating them to spend cash.

According to Amamiya, the decision to get rid of fiat money in Japan is “not an option for us as a central bank,” for the fact that casg is still needed.

“The issuance of central bank digital currencies for general use could be analogous to allowing households and firms to directly have accounts in the central bank. This may have a large impact on the aforementioned two-tiered currency system and private banks' financial intermediation.”

EU Discards CBDCs

The European Union appears not to be ready for CBDCs since the country has been having a wait-and-see decision on the idea.

Early September, the European Central Bank (ECB) President, Mario Draghi, said before the European Parliament that they are not considering issuing cryptocurrency.

The ECB executive showed their unyielding response towards the idea by affirming that “technologies which could potentially be used to issue a central bank digital currency, such as distributed ledgers, have not yet been thoroughly tested and require substantial further development” before the Central Bank could think of using it.

He stressed further that “The ECB and the Eurosystem currently have no plans to issue a central bank digital currency,” arguing that his agency was “carefully analyzing the potential consequences of issuing such a currency as a complement to cash.”

Moreover, Draghi argued further using another popular backing that pointed that central bank would compulsorily have to war against other banks in the retail sector:

“With regard to the central bank administering individual accounts for households and companies, this would imply that the central bank would enter into competition for retail deposits with the banking sector and lead to potentially substantial operational costs and risks.”

Canada says CBDCs can improve welfare gains

November 2017, the Bank of Canada reported in a publication titled “Central Bank Digital Currency: Motivations and Implications,” collectively authored by its Currency Department employee, their stance on national currencies.

While the publication does not speak the mind of the Bank of Canada, it however, showed the agency’s concern, arguing that as society drifts more toward becoming cashless, the more the central bank’s revenue source (seigniorage) becomes compromised.

In the same line, the Bank of Canada report indicated that the nonexistent of transaction fees and financial inclusion are among the benefits of CBDC but stated that anonymity is “undesirable for central bank digital currency.”

In another research by the Bank of Canada in June 2018, S. Mohammad R. Davoodalhosseini, who is an official of the Funds Management and Banking Department of the central bank, said CBDC has “certain potential benefits, including the possibility that it can bear interest,” while “the welfare gains of introducing CBDC are estimated as up to 0.64% for Canada.”

Iran Prohibits Crypto But Issued CBDC

After Iran banned crypto in April, an Iranian government minister stated that an experimental idea of the country’s national digital currency had been designed.

Information and Communications Technology (ICT) Minister, Mohammad Javad Azari-Jahromi, said: “The central bank’s [ban] does not mean the prohibition or restriction of the use of the digital currency in domestic development.”

However, Azari-Jahromi did not say that the nation’s digital currency will be made available to the public, in the same line, he did not state that it will be issued by the Post Bank (that is largely owned by the Iranian government or by another state).

Singapore says CBDCs appears efficient however not in the public context

Singapore is pushing to advance in its quest to research deeply on CBDC, however, this is not public yet.

Around June 2017, the Monetary Authority of Singapore (MAS) published a report on “Project Ubin”, a blockchain-powered idea to put a “tokenized form of the Singapore Dollar (SGD) on a [private Ethereum blockchain].” The project is a partnership between the central bank and blockchain consortium R3.

Meanwhile, in January 2018, Ravi Menon, the managing director of the MAS, condemned CBDCs.

In a conversation with the Financial Times, he said:

“Why would the central bank want to [issue digital currency to the non-bank public]? If there’s any sense of nervousness about the banks, you will have a bank run; everybody is going to go into the central bank [with their deposits] […] And, if people placed their deposits with central banks, who’s going to extend credit?”

Sweden Might require a CBDC

Sweden’s Central Bank (Riksbank) in December 2017 published a plan for the second stage of the “e-Krona” project.

An “e-Krona” is said to be “a general electronic means of payment” and seen as a “complement to cash.”

The publication pointed that the Riksbank “has not yet taken a decision on whether to issue an e-Krona and the aim is not for an e-Krona to replace cash.”

Meanwhile, the reason Riksbank decided to release “e-Krona” is due to the reducing popularity of cash in the country.

If the idea is implemented e-Krona has the potential to operate in two systems: a value-based idea and a registered-based one. The latter intends having cryptocurrency saved in accounts on a central database, and value-oriented e-Krona would be saved independently on “deposited currency accounts.” There is high potential Riksbanks release a CBDC.

The UK: We like CBDCs, but they might endanger the commercial banking sector

The Bank of England showed it stance on CBDC in two separate papers.

In the first paper, the central bank research pointed different risks CBDCs could bring. The research pointed that after initial approximation, there’s no point to show that issuing a CBDC could have negative impact on total liquidity or on the private credit.

Another paper suggested that CBDC could create problems for the current profitable business system depended on by commercial banks.

The research pointed that having digital currencies under central bank’s guide could impact the commercial banking sector negatively:

“Banks may be subject to an outflow of retail deposits, in particular in a scenario of financial stress.”

Also, in May, the governor of the Bank of England, Mark Carney, said the agency maintains an open approach towards implementing a CBDC, but said that wont be possible any time soon.

India Believes Cash Printing is Expensive but CBDC Appears Cheaper

India is among the countries that is researching on CBDCs, around August, the Reserve Bank of India’s (RBI) inaugurated an inter-departmental group saddled with the responsibility of analyzing the importance of issuing a rupee-backed digital currency.

Interestingly, cost was an important factor for researching the fiat-tethered CBDCs. The statistics cited by the Economic Times showed that in 2018 amount used in printing paper notes in the country was around 6.3 billion rupees (around $89 million).

Moreover, the report showed that fiat printing is a motivation for other central banks to issue digital currencies:

“Globally the rising costs of managing fiat paper/metallic money, have led central banks around the world to explore the option of introducing fiat digital currencies”.

EY India’s Mahesh Makhija was quoted to have said that “the idea of a central bank issued digital currency is very promising, though issues around digital counterfeiting will need to be addressed.”

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