In 1694 the Bank of England became
the first public bank to regularly issue banknotes as an alternative to coins,
as a means of payment. Three centuries later, it’s primarily tasked
with maintaining price stability, much like any other central bank
across the world. But these cautious institutions
are now buzzing with talk of a revolutionary concept, a form of money you cannot see:
central bank digital currencies. When you ask central banks around the world
whether they are exploring CBDC, one year ago the answer was 80% of them
were exploring, and now it's nearly 90%. Last year, 40% were experimenting
and now it's 60%. The vast majority of central banks
are exploring CBDC. The idea of digital money is not new.
Many of us use debit and credit cards or payments apps for transactions,
but what would make a central bank digital currency different? One of the big financial developments over the last few years
has been the rise in popularity of cryptocurrencies, with one in particular, bitcoin,
standing out. Following Tesla’s announcement that it bought
$1.5 billion worth of bitcoin in February 2021, the volatile cryptocurrency’s price surged to new highs,
giving it a theoretical market capitalization that is even larger than the world's two largest
payments processing companies: Visa and MasterCard. Unlike traditional money,
cryptocurrencies are not issued by a central bank, but rather via a decentralized network of computers,
typically using blockchain technology. Even Facebook is trying to get in on the act with the 2019
announcement that it would develop its own digital currency, known at the time as Libra
and now rebadged as Diem. And so at that point central bankers started to realize
they were really under some threat. And the question became,
if we can't beat them, do we join them? Investors in bitcoin believe that because there is
a theoretical cap on the number of bitcoins that can ever be mined, the cryptocurrency will become increasingly valuable
at a time when central banks have been printing more money than ever before
to arrest the economic fallout from the pandemic. That's why people sometimes
call bitcoin ‘digital gold’. Many central banks are worried
that the widespread adoption of these independent cryptocurrencies could
weaken their control over the financial system. This could cause financial instability,
especially because cryptocurrencies do not have the legal or the regulatory safeguards that central bank money does.
So why not issue a digital currency of their own? Currently, regular bank deposits, cash
and cryptocurrencies issued by the private sector, such as Diem and Bitcoin,
all have a few features that make them useful, but the hope is that publicly available CBDCs
would have all these desirable characteristics. Unlike your savings in a commercial bank,
which rely on the bank’s promise to fulfill, CBDCs are recognized by law and backed by
the power of the central bank, which cannot go bankrupt. For example, if a commercial bank collapses,
part of your savings could potentially be wiped out. But this wouldn’t be the case for CBDCs,
which could be as trusted as cash, as convenient as a payment app, yet also benefit from the same blockchain technology
which underpins cryptocurrencies. And just like cash, CBDCs could be distributed through commercial banks,
avoiding too much disruption to the financial system or the central bank having to deal directly
with many millions of citizens and businesses. Think of bank notes, which are the closest equivalent
to central bank digital currencies that we have today. Except that they are on paper, of course.
This is money that is issued by the central bank and used daily in retail payments.
The central bank sells bank notes to the commercial banks, and then the commercial banks distribute bank notes
through ATMs to their clients. This means that everyone could have access to this digital currency,
which could bring a lot of benefits. It could make payments faster,
allowing for immediate settlements and no processing delays.
And it could also make payments cheaper. In the U.S., the aggregate cost of making retail payments
ranges from 0.5% to 0.9% of GDP. Digital currencies would
reduce those costs. It also means that more people
could have access to electronic payments. Currently, over 1.5 billion adults across the globe
don’t have access to the financial system and even in an advanced economy such as the U.S.,
more than 6% of Americans don't have a bank account. Issuing digital currencies could also make it easier
for governments to deliver stimulus checks, or even go one step further and make
targeted payments to those deemed most in need. So how soon could central bank
digital currencies become a reality? China is the major economy which is
most advanced in its CBDC development. The People’s Bank of China has been
running tests of its digital currency since April 2020 with the help of four banks in the country.
Tens of thousands of consumers have already been involved with the pilot,
spending two billion yuan in over four million transactions. For China, it could also be a means
of re-asserting control over a financial system challenged by the rapid growth
of fintech companies Ant Pay and WeChat,
these are the dominant payment technologies in China, and they are in the hands of Alibaba and Tencent,
and if Beijing can wrest that back then I think they will. And the way that it’s set up, the e-yuan,
is that it will still be effectively very integrated with the commercial banks but it is effectively
a direct challenge to the payment technologies, they are trying to ultimately displace them.
The e-yuan's going to have its own digital wallet at the commercial bank and over time
people will probably just find it more convenient to use that, and thereby
displacing Ant Pay, for example. There may also be a geopolitical consideration for China,
providing a mechanism to shift away from using the U.S. dollar. There is no doubt that Beijing views the U.S. dollar
as a strategic advantage the U.S. has. The problem is that most of the trade, the real world trade, is denominated and invoiced in U.S. dollars, right, and China sees this and it's hard for them to sort of
push renminbi into the global financial system, the global trading system,
but they’re trying. But if they had a digital currency that would be
potentially a really fascinating angle. So you can see, if it has got a technological advantage,
that perhaps this is a way for people to think about the renminbi in a different way and perhaps, you know,
ultimately start to chip away at hegemonic status of the dollar. But it's not just China. The European Central Bank has plans for a digital euro,
although it may be a few years before it is available. We are going to have to address all the issues
of anti-money laundering, financing of terrorism, privacy of users and all their information,
the appropriate technology that will carry that digital currency, and this is, you know, a project that could probably take us,
two, three, four years before it is launched. This has got people wondering whether
issuing a central bank digital currency could interfere with the
effectiveness of monetary policy. Central banks have addressed CBDCs so far,
really as part of a payments discussion. That’s a discussion for monetary policy committees,
for the ECB governing council, whether they want to use CBDC or not,
but it’s too early to have that discussion. But theoretically if the central bank wanted,
they could also pass on negative rates to the holders of
central bank digital currencies? Think of CBDC as being the future of bank notes,
bank notes do not bear interest. And so, if you follow that line of reasoning
then CBDC should not bear interest. And if you want CBDC to bear interest
then you're creating something different. A lot depends on how much people would use CBDCs,
and no central bank wants them to completely replace traditional cash,
but rather to compliment it. One risk associated with CBDCs is that
in an extreme situation, such as after a financial crash, you could see people withdrawing
their deposits from commercial banks and opting to store their money
in digital currencies backed by the central bank. Trouble would be if CBDC would replace
bank deposits in a large amount because then what happens is that savers could
shift their savings from bank account to CBDC. Then banks could have a problem for funding.
This might have an effect on the financing of whole economy. People can shift saving from bank account to CBDC just with a click.
This would be very dangerous obviously. As we move towards a more cashless society,
will central bank digital currencies ever become as trusted and as convenient as bank notes?
Quite possibly, though it may take months, maybe even years. The trust in private money
is built on the trust in the currency and the fact that behind that there is a central bank
which has tools to keep the value of the currency. We have to buy this trust
and that's why we need to stay in the economy and the way to stay in the economy
is to make sure people trust us. Thank you for watching.
Would you ever use a central bank digital currency? Let us know in the comments,
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