Are central bank digital currencies the future of money or digital hype?

09 April, 2021Tony Deary

Tony Deary - 30.04.20On 12 December, during the Chinese shopping festival ‘12-12’, the residents of Xiangcheng, China, had the chance to win some free shopping money through a government sponsored lottery. So what’s new about that? This money wasn’t the cold, hard, type, but digital.

Tony Deary reflects on what could be one of the most disruptive innovations in the history of money.

Enabling the digital economy – smart money

New business models that utilise ‘smart money’ are rapidly emerging, such as digital bearer instruments. Tokenised money, which is one popular approach for using digital currencies, operates in a similar way – eliminating the need of costly intermediaries for clearing and settlement.  Digital currencies transacted on these platforms are opening a host of innovative applications that utilise programmable financial transactions.

In the absence of government-backed digital currencies, these transactions will be fulfilled by the use of privately issued forms of digital currency instead.  This is putting pressure on policy makers and governments to explore sovereign money solutions that satisfies both the traditional role of money and the future role in the upcoming digital economy.

Central banks take action

With the rise of crypto currencies, regulators have been scrambling to understand the implications of digital currencies on their economies.  During her tenure as head of the IMF, Christine Lagarde did a call-to-action for Central Banks around the world urging them to embrace the idea of sovereign digital money.  

Rather than banning new forms of money, Lagarde advised Central Banks to investigate the technologies and legal frameworks that could bring CBDC into the fold of the international monetary system.  This was a significant departure from the initial cautious rhetoric of digital currencies being dubbed the “Wild West” and something to be avoided.

Within a year of the call to action even the ultra-conservative Bank of International Settlements (BIS) founded a research facility that is experimenting with CBDC for cross border settlements. There are now numerous wholesale and retail CBDC projects on-going around the world, but at varying stages of development.

Central bank digital currencies are already here

The Chinese government may be ahead of the game.

The Xiangcheng lottery was the fourth deployment by The People’s Bank of their national currency – the yuan – in digital form. Retailers were provided with point-of-sales technology with near-field communication (NFC) and QR code capabilities that allowed the digital yuan winnings to be spent. 

It has used these free ‘cash’ handouts as an opportunity to test and iron out the teething problems of a national digital currency system for their 1.4 billion citizens.

The most disruptive innovation in the history of money?

As digital money evolves, the disruption to financial services industry is potentially huge – so some jurisdictions are moving very cautiously. There are many factors to consider from practical operational issues like privacy, security and universal access, to impacts on monetary policy and financial stability.  

However, first mover advantage in this space could mean the difference between having a say in setting the eventual global CBDC standards or having to follow someone else’s approach.

To help navigate the issues from a UK perspective, a panel from the Whitechapel Think Tank’s ’Future of Payments Working Group‘ will be featured on our next webinar series on 14 April.

The panel hosted by our Centre for Digital Banking and Finance will:

  • discuss opportunities from a wholesale vs retail perspective
  • clarify the taxonomy of a digital currency (i.e., vs crypto currency)
  • touch on the fundamental technological design choices behind these instruments
  • consider the effects on today’s banking and payments infrastructure.

Tony Deary is an Associate at LIBF Global Learning based in Singapore and is a member of the Whitechapel Think Tank’s Future of Payments Working Group. 

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