The New Money Era

Central bankers seem to be changing their minds about the potential of digital fiat currencies.

When Bitcoin first burst on the scene in 2009, central bankers were skeptical. In the ensuing years, as thousands of new cryptocurrencies were launched and cryptotrading made some speculators rich—or poor—overnight, bank officials remained wary. “Overall, the decentralized technology of cryptocurrencies, however sophisticated, is a poor substitute for the solid institutional backing of money,” a Bank for International Settlements (BIS) report concluded in June 2018.

But on January 21 this year, something changed. Six leading central banks from developed markets—the Bank of England, Bank of Canada, Bank of Japan, European Central Bank (ECB), Sveriges Riksbank and Swiss National Bank—joined with the BIS in a coalition to appraise the potential of central bank–issued digital currencies (CBDCs), assessing “CBDC use cases; economic, functional and technical design choices, including cross-border interoperability; and the sharing of knowledge on emerging technologies.” It is expected to issue a report in a few months. Most of these central banks had toyed with the idea of CBDCs, but the coalition announcement suggested that an actual state-backed digital currency may be imminent.

Then the following day, January 22, a who’s who of national and international financial leaders at Davos gathered for a “special high-level, closed-door” roundtable to discuss not only whether and how to accommodate new monies in the monetary architecture, but whether central banks should issue their own digital currencies. “Or is the better strategy to update and upgrade existing structures?” a briefing note for the event read.

That same month, the BIS released the latest findings of an annual survey of 66 central banks. Entitled Impending arrival—a sequel to the survey on central bank digital currency, it found that approximately 80% of central banks (up from 70% in 2018) were looking at CBDCs. Forty percent of central banks had progressed from the conceptual phases to experiments or proofs-of-concept, with another 10% (all from emerging-market economies) developing pilot projects.

Guibourg, Sveriges Riksbank: Libra was a wake-up call for central banks all over the world.

What caused the change in attitude? In part, it was a natural evolution of thinking that grew out of research into digital currencies. “Central banks were previously analyzing CBDCs, but the number of banks doing that were in the minority,” says Gabriela Guibourg, an economist at Sweden’s central bank, the Sveriges Riksbank. “Now, the international landscape has changed dramatically.”

But the real impetus came out of the private sector. On June 18 last year, tech giant Facebook announced it was leading a group—including global giants such as Mastercard, Visa and eBay—to create a new global digital currency: Libra. “The web is 30 years old, [but we] still don’t have an easy, cheap, efficient way for people to move money around,” David Marcus, co-creator of Libra and former president of PayPal, stated at a panel discussion on digital currencies at Davos in January. Libra would be a “stablecoin,” linked to a basket of stable assets to reduce volatility. Libra coins would be minted by the independent, not-for-profit Libra Association, making it a kind of central bank.

Most importantly, while Libra is not the world’s first stablecoin, Facebook’s worldwide network meant it would be a global stablecoin, or GSC. An October 2019 report by the G7 Working Group on Stablecoins argues that, given GSCs’ reach and ability to scale quickly, they could have a detrimental impact on monetary policy, sovereignty and financial stability.

“Libra was a wake-up call for central banks all over the world,” says Guibourg, who leads a team analyzing the legal aspects of an “e-krona” in Sweden. “Although innovations from the private sector are often good for the market, some, like Libra, can be dangerous and have risks that are difficult to manage.”

Guibourg notes that the power of network effects means a GSC like Libra could cause real harm to countries with smaller currencies. “Defending the national currency unit of account is one of the main mandates of central banks,” she points out.

Libra has made it more urgent, says Guibourg, for central banks to consider the potential of issuing CBDCs. Russia’s central bank is actively exploring the concept as well as stablecoins backed by real assets. The latter “have greater potential for use on the market as a means of investment and, in certain cases, a medium of exchange, but not as a means of payment,” a central bank spokesperson tells Global Finance. However, the bank’s view is that it is not obvious what additional benefits CBDCs offer compared to existing noncash payment instruments. The US Federal Reserve, for example, put CBDCs on a back burner, seeking instead to improve existing payment systems.

“[A CBDC] is a very scary thing for a central bank,” says Darrell Duffie, finance professor at the Graduate School of Business, Stanford University. “It completely changes the financial system in ways that are entirely unpredictable. Central banks are concerned about maintaining their political independence, which could be interfered with by governments and politicians if central banks are administering a digital currency.”

Ultimately, the Libra threat may be less than it first appeared. Many of its most prominent members stepped back from the alliance by October. “The threat is hardly imminent,” analyst firm CB Insights writes in its 2020 Tech Trends report, “but the risk is palpable enough that regulators in many countries have sought to clamp down on Libra and Bitcoin.”

Duffie, Stanford; Central. bank digital currency completely changes the financial system in ways that are entirely unpredictable.

Meanwhile, technology marches on. “Cash is disappearing in Sweden,” notes Guibourg. Sweden’s Riksbank started investigating the idea of an e-krona in 2017 as a way of ensuring the public continues to enjoy access to a state-guaranteed means of payment as cash declines. On February 20, the central bank announced an e-krona pilot in conjunction with Accenture. The pilot, which will run for a year, will enable payments, deposits and withdrawals with an e-krona from a mobile phone, card or watch. The Riksbank says the pilot does not mean it will actually launch an e-kronor in future, but it is not alone in its digital coin experiments.

“We know that other central banks, because of rapid digitization and the entrance of big tech companies, are considering whether they need a CBDC,” Guibourg adds. Banco Central Del Uruguay piloted an e-peso for six months in 2017-2018, during which consumers were able to access the e-peso via digital wallets. The pilot was deemed a success, and the bank is currently evaluating the future prospects for further trials or issuances.

The e-peso or e-krona would be a general-purpose CBDC, which can be used by members of the public and stored in digital wallets. Some central banks also talk about wholesale CBDCs, which would be used only in interbank transactions, such as cross-border payments and securities settlement. Guibourg argues central banks should now focus more on retail CBDCs to forestall preemption by an initiative like Libra.

Senegalese investment bank Banque Regionale de Marches launched the West African Economic and Monetary Union’s first digital currency with help from fintech eCurrency Mint. Its eCFA is pegged to the CFA franc fiat currency. Other countries, namely France, Turkey and the Bahamas, have announced plans to commence CBDC pilots this year.

Marie Tatibouet, chief marketing officer at, a Chinese cryptocurrency exchange platform, says a CBDC can transform the financial stability of a country as it allows central banks to have a better check on the financial expenditures of its citizens. “It can also help in risk reduction, transparency and auditability, creating direct monetary policies that can in turn help curb corruption on a national level and drive overall financial inclusion for emerging economies,” she says.

In China’s case, the central bank’s Digital Currency and Electronic Payment project, which is expected to be launched soon, is about having greater control and oversight of money flows. Some even suggest it could be used to circumvent the dominance of the US dollar in global trade. “The Chinese are closest to launching something like this at scale,” CB Insights writes. There is fevered speculation about which developed-market central bank will actually be first to launch a CBDC. “It is difficult to predict what will happen,” says Guibourg of the Riksbank, but she believes CBDCs are likely to proceed quickly now in light of Libra.

How Would A CBDC Work?

In terms of how the CBDC is distributed, it could be account based. In the case of general-purpose CBDCs, members of the public would need to hold an account at the central bank, something that doesn’t happen today. CBDCs can also be token based, like the e-peso, where payments are made by transferring digital tokens. Central banks could issue digital currencies themselves or distribute them via a third party.

“It’s not obvious that the central bank needs to be the provider of the products that run on the rails,” economist and Senior Minister of Singapore, Tharman Shanmugaratnam, stated at Davos during a panel discussion about creating a credible and trusted digital currency. “Maybe in countries that have an inadequate financial sector, but I worry about [CBDCs] going too far into the retail sector.”

CBDCs are likely to coexist alongside fiat currencies (that will provide a backup when electronic systems fail) and other digital currencies or stablecoins. “I expect we’ll see multiple different stablecoins, which will compete,” Neha Narula, director of MIT’s Digital Currency Initiative, stated at Davos. “But, ultimately, a CBDC is really the better choice, as it directly reduces risk and allows a central bank to provide a public option for money.”

Striking the right balance between public and private sector digital currencies could prove challenging. At Davos, Benoît Coeuré, head of the BIS Innovation Hub, said flexibility and diversity will be important. “There can be a mix of public and private solutions,” he explained. “We need that innovation coming from the private sector.”

One example of how the private and public sector could potentially work together in digital currency is the IMF’s proposal for a “synthetic central bank digital currency (sCBDC),”  which would give private stablecoin issuers access to central bank reserves. “This option minimizes the risk of private stablecoins and utilizes the advantages of large tech firms in issuing and managing digital currencies,” states a December 2019 paper, Public or Private? The Future of Money, published by the European Parliament’s Policy Department for Economic, Scientific and Quality of Life Policies.

The Libra team believes it brings a good technological solution to the network for hosting stablecoins and CBDCs. Blockchain software technology company ConsenSys published a white paper in January proposing that CBDCs run on the Ethereum blockchain. Blockchain is not essential for CBDCs to operate, but ConsenSys argues it provides the “secure, global-scale, interoperable settlement platforms that CBDCs require.” The Riksbank chose blockchain technology for its e-krona pilot.

Dan Popescu, an independent commodities and currencies analyst, speculates that the BIS group of central banks could end up creating something almost identical to Libra, but effectively owned by governments. It could be a form of “digital SDR” (special drawing rights), he says, which is what former IMF head and now president of the ECB Christine Lagarde referred to in a 2017 speech, when she spoke about more-stable virtual currencies that “could be issued one-for-one for dollars, or a stable basket of currencies.”

The question remains whether central banks can fully embrace digital currencies in any meaningful way that delivers real change and the creation of a monetary system that works for everyone. “Central banks know and fully understand that, without doubt, the future of money lies in digital currencies; and they want a slice of the action,” says Nigel Green, CEO of deVere Group, an independent financial advisory firm. “However, they are intrinsically tied to the traditional and far-reaching system of fiat currencies and all its associated issues, which is—for the time being at least—holding them back from going all in.”

In the BIS survey cited earlier, while the likelihood of central banks issuing any type of CBDC may have increased, 70% see themselves as unlikely to do so in the foreseeable future. Another 10% indicated they were likely to issue a general purpose CBDC (for use by the general public) in one to three years, and 20% in one to six years.

Stanford’s Duffie doubts we’ll see a general purpose CBDC issued by a developed-market central bank in the next five years. He believes central banks are right to do their own R&D on digital currencies, noting that “even if a CBDC doesn’t come to fruition, the mere idea of it has changed the discussion about payments and improving the existing payment systems.”