With more countries exploring digital currencies, traditional cash could soon become a thing of the past, writes Paul Budde.
CENTRAL BANKS across the world have been exploring the possibility of implementing a digital currency – Central Bank Digital Currencies (CBDC). A digital currency can provide a safer financial environment as it will enable individuals, private companies and several financial institutions to settle directly in central bank money rather than through bank deposits.
Therefore, through digital currencies, there will be a reduction in liquidity concentration as well as a reduction of credit risk in payment systems.
This has resulted in several countries developing their own digital currency while other countries are in the process of or are exploring/have explored the possibility of implementing a digital currency.
Here is an overview of some of the international developments.
The Reserve Bank of Australia (RBA) has partnered with the Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys to explore CBDC using Distributed Ledger Technology (DLT). The RBA stated that the project will explore other features such as programmability and automation features of a tokenised CBDC and financial assets.
RBA Assistant Governor Michele Bullock said in a statement:
A report published last October by the Senate Select Committee on Australia as a Technology and Financial Centre looks favourably on cryptocurrencies.
Another interesting development is that ANZ has become the first bank to mint an Australian dollar stablecoin – the A$DC. Stablecoins – based on blockchain technology – are cryptocurrencies where the price is designed to be pegged to a cryptocurrency, fiat money (such as the Aussie dollar), or to exchange-traded commodities (such as precious metals or industrial metals). They can be used to access other digital currencies.
A key benefit is that this avoids the expensive conversion of Australian dollars into U.S. dollars.
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The People’s Bank of China has developed the digital yuan, which is a central bank digital currency that aims to replace a portion of paper cash in circulation. One of the purposes of the digital yuan is to increase competition in China’s mobile payments market which is currently dominated by Alipay and WeChat Pay.
China is already very advanced in cashless payments and the digital yuan will fasten the process. It was also announced that the digital currency will be legal tender and no interest will be paid on it.
It has banned cryptocurrency trading multiple times. An outright ban on crypto mining was seen as a massive setback for the industry.
The USA has launched several CBDC pilot programmes. After China announced its own digital currency, the U.S. Federal Reserve is now planning its own digital dollar prototype.
Two prototypes of the digital dollar are now being developed by officials at the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology (MIT).
However, there are still several issues that need to be addressed by the Federal Reserve, Treasury and Congress for this project.
They include:
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A paper was published on CBDCs, exploring how they could be designed for payments and discourage store of value. It suggests a two-tier system (first tier is payments, second tier is store of value). The main driver behind CBDC is efficient retail payments, which rejects CBDC as a store value.
The Bank of England is exploring the possibility of a digital currency. It intends on engaging with stakeholders on the benefits, risks and practicalities of introducing a CBDC.
The country also changed its VAT laws (GST) to exclude digital currencies from taxation as a commodity.
This country launched Central Bank Digital Currency testing last year. The first phase consists of bank focused experiments on the basic function of CBDCs such as payment tools, issuance and distribution. The overall goal is to test the technical feasibility of the core functions that a CBDC would require. They will only move forward with feedback from the Japanese public
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The Central Bank of Russia (CBR) aims to launch the digital ruble prototype this year. It mentioned that a digital ruble gained 83 per cent approval. However, the CBR received backlash from Russian regulators and local financial industry players due to its centralisation.
The aim is to launch a bank pilot system for testing and public feedback. Last week, the Government signed a roadmap to regulate crypto operations, signifying risks for the Russian financial market.
Other countries trialling bitcoin include:
Key countries where crypto mining takes place include the U.S., Kazakhstan, Russia, Canada, Malaysia and Iran.
That cryptocurrencies are not just a situation of plain sailing became clear again this month when the market collapsed. This is mainly affecting those people who trade in the currency – you could call them gamblers.
However, the underlying trend for cryptocurrency remains solid. The collapse shows that for the currency to become more widely accepted, better regulations need to be put in place. Something that will sort itself out over time.
Paul Budde is an Independent Australia columnist and managing director of Paul Budde Consulting, an independent telecommunications research and consultancy organisation. You can follow Paul on Twitter @PaulBudde.
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