Central Banks Soften Their Stance On Digital Currencies

Central banks are getting on the digital currency bandwagon.

The race is on, as a growing number of central banks line up to pilot digital currencies. According to a December 9 report in Cointelegraph, China could run a trial of a digital yuan in Shenzhen before the end of 2019. The announcement comes, however, on the back of a recent crackdown by Chinese authorities against local cryptocurrency exchanges, one of many in recent years as China seeks to rein in excesses in the industry.

In Europe, France’s central bank slated the end of Q1 2020 for testing a “digital euro.” African central banks are also softening their positions on digital currencies. At a banking conference in November, Ghana’s central bank governor, Ernest Addison, stated that the country could soon introduce a digital version of the cedi in response to the fast-paced digitalization of payment systems in the West African nation. “Digital financial technologies will continue to define the future of our banking experience,” Addison stated, pointing to exponential growth in the country’s mobile-money transactions.

So, what is sparking the growing interest in central bank digital currencies, or CBDCs? “Given the developments we are seeing, not so much in the bitcoin segment, but in stablecoin projects [Facebook’s Libra project, for example], we’d better be ahead of the curve if that happens,” Christine Lagarde, the European Central Bank’s new president stated recently. “Clearly there is a demand out there that we have to respond to.” 

Darrell Duffie, the Dean Witter Distinguished Professor of Finance at Stanford Business School, told Global Finance that Facebook’s Libra digital currency announcement has heightened awareness among central banks. Assuming regulators don’t stand in the social-media concern’s way, its 2.4 billion users could be cross-sold payment services using Libra.

Central banks, however, are hardly recent converts to digital currencies. “A range of countries have been working on CBDCs for three to five years, most notably England, Canada and China,” says Ross Buckley, a law professor at the University of New South Wales in Sydney, Australia. “China is saying it will soon issue a response to Libra, but I think they would have anyway,” said Buckley, “because [a digital currency] gives the government two things: more information about what its citizens are doing, and more capacity to control them, as a CBDC is programmable money.”

Building a CBDC may be easier said than done, however. Duffie says protecting privacy while controlling illegal transactions may be a lot to handle for some central banks. That said, many central banks, like the US Federal Reserve, retain the constitutional power, directly or indirectly, “to coin money,” which gives them an advantage over private companies like Facebook. “Cryptocurrency innovations—if they really are advantageous—are likely to be nationalized at some point as an exercise of national sovereignty,” Richard Sylla, Professor Emeritus of Economics at New York University Stern School of Business told Global Finance.