Central banks are considering digital currencies for different reasons. In Europe and China, they are seen as a defensive measure to ensure authorities retain control of fiat currencies and the money supply as private sector alternatives emerge. These include stablecoins, a form of cryptocurrency pegged to an existing currency.
By allowing payments to be made with digital “tokens,” cryptocurrencies could challenge banks’ historical control over payment systems if they expand.
“If central banks do not provide [CBDCs]it will be provided by the private sector through stablecoins,” said Elliott, who consulted with the IMF, World Bank and Asian Development Bank.
He said CBDCs “are almost inevitable as political and bureaucratic tailwinds are very strong and consensus is formed on key high-level principles.”
The catalyst for the European Central Bank to consider a digital euro was Facebook’s announcement in June 2019 that it would create Libra to allow its users to make payments on its social network.
That idea stalled after intense criticism from global governments and central banks, who viewed scandal-ridden Facebook as an inappropriate depository for a new global currency, and saw the broader threat to the world. big tech companies’ money.
ECB President Christine Lagarde champions CBDCs as an alternative to privately-sponsored stablecoins, and her view is gaining more support from European lawmakers concerned about Silicon Valley’s growing power and Mastercard’s dominance and Visa, two American companies, in global payments. .
Meanwhile, the People’s Bank of China is well advanced in developing a digital yuan to counter the growing power of WeChat Pay and Alipay, and which could be used to make the renminbi a stronger global currency for commerce. .
Design and risk issues
Australia is also considering an eAUD. The Reserve Bank of Australia has been encouraged to consider risks and opportunities by industry and government.
The government said in its December response to a Senate committee report on Australia as a financial and technological center, that the Treasury – in partnership with the RBA – would conduct a review of the viability of a retail CBDC in Australia in the second half of this year. Advice will be provided to the government by the end of 2022.
RBA Governor Philip Lowe said in December that he was working with other central banks on CBDC design and risk issues.
A public policy argument for a retail CBDC “could emerge quite quickly as technology evolves and consumer preferences change”, while Dr Lowe also referred to the risk of a bank run if depositors favor CBDC versus commercial bank deposits.
CBDC proponents also believe it will reduce payment costs – given the high money transfer fees of commercial banks – and can be programmed to support micro-payments.
“One of the reasons I think it’s almost inevitable in places like Australia and the United States is that you now have the private sector, via stablecoins, and China and the ‘Europe via CBDCs – so how can you sit back and not move on?’ said Mr. Elliott.
“The push will see the Bank of England do it in time, and I think Canada will eventually move on. In the United States, even if there are more skeptics, five years from now, I think they will see a movement that will be impossible to resist.
The U.S. Federal Reserve said in a January working paper that it would “continue to explore a wide range of design options for a CBDC.”
“While no decision has been made on whether to pursue a CBDC, analysis to date suggests that a potential US CBDC, if created, would better meet the needs of the United States by being protected by confidentiality, intermediary, broadly transferable and identity verified,” the Fed said.
The U.S. Fed said in January that it had no plans to proceed with issuing a CBDC without clear support from the executive branch and Congress, “ideally in the form of a law of specific permission”.
In its new report on design principles for a retail CBDC, Oliver Wyman and AWS argue that central banks need to define a clear vision of what digital currency should achieve. In addition to pushing back on big tech, some central banks want to replace cash, while others will want to reduce payment costs or improve financial inclusion.
The principles will illuminate many trade-offs in design choices, including the level of centralized control, boundaries, and decisions about user privacy, starting with whether the identity of transaction participants remains anonymous – one of the benefits of cash.
“Different participants in the CBDC ecosystem may be granted different levels of visibility into user information, such as CBDC distributors, payment service providers (PSPs), and central banks themselves,” the report states.
If private stablecoins develop alongside CBDCs, central banks could impose capital and liquidity requirements and be able to use official backstops. Central banks could also use the private sector to push digital cash out through their digital wallets, rather than the central bank having to set up a system of retail digital cash accounts.
“We assume that the private sector will play a critical role in distributing a CBDC to the public and providing a gateway for access to the CBDC system,” the report, titled Retail central bank digital currency: from vision to deliverysaid.
However, he also cautions that “central banks cannot assume that the private sector will want to play the distributor role”, so “it is essential that the central bank provides clarity on expected investment costs, risks and potential business models of this key role.”