Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

New money: Central banks lay out operating manual for digital cash

Published 30/09/2021, 14:09
Updated 30/09/2021, 17:55
© Reuters. FILE PHOTO: Pound and U.S. dollar bills are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration/File Photo

© Reuters. FILE PHOTO: Pound and U.S. dollar bills are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration/File Photo

By Marc Jones and Tom Wilson

LONDON (Reuters) - A group of central banks sketched out a potential operating manual for digital cash on Thursday as they aim to strike a balance between keeping up with cryptocurrencies and concerns that the new technology could upend commercial lenders.

Worried that the explosion of bitcoin and its ilk could weaken their control of money, policymakers from Beijing to Washington are exploring central bank digital currencies, known as CBDCs.

And while a widely-used digital dollar or euro may still be years away, work by central banks is gathering pace as consumers increasingly ditch coins and notes in favour of digital payments on debit or credit cards and mobile phones.

The seven central banks - including those in the United States, Britain and the ECB in the euro zone, but not China - said publicly-used "retail" CBDC must harness both public and private players to mesh with existing payment systems.

The tech should be useable with existing domestic payments systems, with strategies for adoption tailored to on-the-ground economic conditions, said the central banks, working alongside the Bank for International Settlements.

The existing financial system must be given time to adjust to the introduction of CBDC, they said, flagging risks of what could amount to slow-motion bank runs if commercial bank customers suddenly shifted savings to the new tech.

"Regardless of the design, developing and running a CBDC system would be a major undertaking for a central bank," they said, stressing the involvement of private operators must be closely monitored to ensure public trust in the tech.

How a central bank digital currency works: https://fingfx.thomsonreuters.com/gfx/mkt/lbvgngxympq/Pasted%20image%201633001136766.png

STABILITY RISKS

Unlike cryptocurrencies like bitcoin that are usually run by private actors, CBDCs would be equivalent to cash, issued and backed by central banks. They differ from the electronic money used in billions of transactions daily that is mostly funnelled via commercial banks.

The People's Bank of China is the most advanced among major economies on CBDCs, and is planning its biggest digital yuan trial at the 2022 Beijing Winter Olympics.

Meanwhile, the U.S. Federal Reserve will "soon" release research examining the costs and benefits of a CBDC, Fed Chair Jerome Powell said last week.

Commercial banks, fretting that a retail-focused CBDC could cannibalise their deposit bases, are trying to exert influence on their design.

© Reuters. FILE PHOTO: Pound and U.S. dollar bills are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration/File Photo

The central banks sought to downplay the threat of retail-focused CBDC to lenders' business models.

"Our analysis suggests the impacts on bank disintermediation and lending could be manageable for the banking sector," they said, with any impact likely limited in "plausible" levels of adoption.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.