During the last few years, most central banks decided to explore a new monetary and payment system option: the Central Bank Digital Currency (CBDC). Indeed, all leading central banks are researching or planning to implement a sovereign, national CBDC shortly, with the People’s Bank of China leading the race among the world’s major economies. Currently, digital currencies have become legal tender in ten countries, with Jamaica and Nigeria as the last entries. However, this development is likely to step up due to the financial and commercial challenges generated by the pandemic, the disruptions in global and regional supply chains, and the war in Ukraine. More specifically, the latter strengthened an entente between Beijing and Moscow regarding the digitalization and de-dollarization of their economies, especially following the US-China trade war in 2018. Although there is great interest in the numerous opportunities that digitalization and the institution of a CBDC might have in advanced economies, a certain amount of skepticism still persists. For example, Kristalina Georgieva, director of the International Monetary Fund (IMF), expressed her concerns regarding cryptocurrencies at the annual World Economic Forum in Davos a few weeks ago and defined them as a coin but not money due to their incapacity to store value. However, she added that a CBDC could be a stable currency only whether central banks and governments can generate global common standards and interoperability to generate a “global public good” easy to transfer between countries. By contrast, the Bank of Thailand governor Suthiwartnarueput reasoned that CBDCs are precarious and are “more of an investment than a medium of exchange.” All in all, the experts in Davos established that “good design is key to a successful CBDC.”
All types of legal tender (or money) have three requirements. First, they are units of account and measurement for transactions and balance sheets. Second, they store value through time. Third, they are mediums of exchange between buyers and sellers of goods and services. Therefore, any CBDC must fulfill those criteria without jeopardizing the financial and monetary stability of the system, threatening the overall harmony with other forms of money, and braking general efficiency and modernization. More generally, a CBDC is “a digital payment instrument, denominated in the national unit of account, which is a direct liability of the central bank.”
Implementing a digital currency generates multiple opportunities. For example, CBDC could drastically improve efficiency and reduce the costs of international and inter-banks transactions due to increased competition in the payments market. Furthermore, they can be traced more effortlessly, reducing the possibilities of fraud and evasion and improving financial inclusion for all citizens since everyone could now be a depositor in the central bank. Finally, CBDCs are another tool that central banks might manage when executing their monetary policies, thus increasing the speed of the transmission mechanism. Regrettably, there also are some drawbacks from the wrong institutionalization and management of digital currencies. For instance, trans-national exchanges could create significant tensions and disagreements that first need a solution and protection from digital theft and terrorist use with a resilient cybersecurity system. Furthermore, CBDCs could make bank runs even worse since generated in unlimited quantities and unconstrained by materiality as banknotes. Similarly, they would completely nullify negative interest rate policies employed by central banks since commercial banks will shift their financial assets with negative rates into CBDC deposits.
The successful implementation of a national digital currency requires some essential features. First, all CBDCs should be convertible at par with the other forms of money in circulation and as convenient and accepted as using different types in every transaction. Secondly, they need to bear no or low costs to users and follow a robust legal framework and standards that can actually control and manage it. Moreover, CBDC-users must be protected from cyber-attacks and other threats, and its infrastructure should be resilient from operational failures and disruptions while maintaining the capacity to process multiple transactions and expand to accommodate new users. Finally, the CBDC payment system should be instantaneous and always available, with the ability to interact and operate with other payment systems. For this reason, many countries are waiting for other major economies to lead the way and then learn or copy their implementation model, especially the US-CBDC model. Indeed, the design must respect the fundamental characteristics but, at the same time, protect users’ privacy and guarantee cybersecurity, a task that a developed democracy like the US must implement in its system.
However, Washington is far behind other countries on CBDC development as the UK. Nevertheless, the Federal Reserve’s (Fed) policy regarding digital currencies started to change after the report in January 2021, which opened a door to this possibility despite the skepticism of its chairman Jerome Powell. Still, the article did not specify when or how such digital currency should work but only argued that such innovation “could result in faster, safer, and cheaper payments.” More recently, US President Biden released an Executive Order in March 2022 to ensure the responsible development of digital assets and currencies and to begin regulating this sector. The order argued the necessity of common standards for digital assets to protect investors and businesses. However, it also established the underlying principles for the subsequent valorization of US digital assets as democratic values and privacy promotion to foster competition and interoperability but without dropping the dollar’s privilege as the world’s reserve currency. Therefore, the White House is open to generating its digital currency under the appropriate supervision and surveillance. Following the order, in May the Fed started to research the best policy and regulation for the subsequent adoption of a CBDC. Indeed, the US central bank expressed the necessity to regulate an environment where all types of payments can coexist. Furthermore, the presence of a US digital currency “privacy-protected, intermediated, widely transferable, and identity-verified” is crucial for preserving the country’s status in the global economy.
Many experts and analysts argued for the necessity of CBDCs to foster innovation and reply to the drastic change that occurred in the payment systems through digitalization. However, there are still doubts regarding the possible implementation of a sovereign digital currency. Indeed, financial risks and cyber threats can jeopardize the successful implementation of digital currencies. Furthermore, there is still confusion between researchers and economists, with numerous theories and models circulating on what should be the best possible implementation and on how to overcome all the challenges. Until now, perhaps the most promising model is the one proposed by Bindseil and Panetta, directors at the European Central Bank, with a two-tier digital currency system, one for commercial banks and financial institutions, the other for retail consumers. In the meantime, most countries are waiting for the US before implementing a definitive version of their own digital currencies. The path is still long and full of uncertainties, but one thing is inevitable: the countries that will wait longer will also take fewer returns from their innovative investments.
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