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Why are governments exploring digital currencies?

Why are governments exploring digital currencies?

Government authorities are increasingly investing time and resource in researching, experimenting with – and in some cases launching – digital currencies.

Central bank digital currencies (CBDCs) come in two forms: general purpose (or retail) CBDCs, which would be available to the general population and businesses; and wholesale CBDCs for interbank settlements.

Public authorities are at different stages, and have different motivations, for exploring CBDCs. They are interested for both ‘reactive’ reasons, such as declining cash use and the potential threat to fiat currency of private money such as so-called stablecoins and crypto-currencies; and ‘proactive’ reasons such as the public policy possibilities in areas such as financial inclusion and ‘programmable money’.

CBDCs: international bodies step up their work

The G7 (Group of 7) nations and, more frequently, Bank for International Settlements (BIS) are among the international bodies to have issued principles or guidance on CBDCs. For example, the G7 published 13 CBDC public policy principles in October 2021 for the implementation of retail CBDCs – including principles on ‘payments to and from the public sector’; and BIS published ‘Central bank digital currencies: foundational principles and core features’  in October 2020.

Global Government Fintech tracks digital currency developments across the world, outlining how public authorities are exploring different CBDC architectures and approaches.

Some countries already have a CBDC: the Bahamas launched its ‘Sand Dollar’ in October 2020. Eastern Caribbean nations began to roll out blockchain-based digital currency ‘DCash’ within their currency union in April 2021.

CBDC developments in major nations

Most major nations are yet to commit to launching state-backed digital money although China is at an advanced stage of developing and trialling its CBDC, known as the e-CNY or ‘digital yuan’.

In the UK the Bank of England set out five ‘core principles’ that would form the backbone of its digital pound explorations in June 2021. The principles’ publication came just weeks after the central bank announced that it is was setting up a CBDC unit, a ‘CBDC Engagement Forum’, ‘CBDC Technology Forum’ and would comprise half of a taskforce with HM Treasury (HMT) to ‘co-ordinate the exploration’ of a potential digital pound.

The UK seems to be moving at a similar pace to the Eurozone: the European Central Bank (ECB) launched its ‘investigation phase’ into a potential digital euro, which is expected to run for two years, in October 2021 and has picked 30 private-sector representatives to advise on ‘the ECB on the ‘design and distribution’ of a potential digital euro.

The Federal Reserve released a 40-page paper into the pros and cons of a potential digital dollar in January 2022. The US authority’s consultation was described as the ‘first step in a discussion of whether and how a CBDC could improve the safe and efficient domestic payments system’ and does not favour any policy outcome.

ESSENTIAL READING

Global Government Fintech’s dedicated Digital Currencies section 

‘G7 publishes CBDC public policy principles’ – our news story (13 Oct 2021) on 13 public policy principles for the implementation of retail CBDCs – including principles on ‘payments to and from the public sector’ and international development – published by the Group of Seven (G7) nations.

‘D€: unanswered questions (and quirks) amid Europe’s CBDC nitty-gritty’ – our analysis (20 Sept 2021) of eurozone central banks’ digital currency explorations ahead of the European Central Bank’s  investigation phase into a potential digital euro.

‘Account-based CBDCs built on digital ID are way forward: BIS’– our news story (23 June 2021) on the BIS setting out its recommended approach to fundamental elements of CBDC design in a chapter of its Annual Economic Report for 2021.

INTERESTED IN THE TECHNOLOGY BEHIND CBDCs? WATCH THIS =>  

Global Government Fintech organised an international webinar, in partnership with Amazon Web Services Institute (AWSI), entitled ‘Delivering Central Bank Digital Currencies (CBDCs): Exploring the Technology Challenge’ on 22 April 2021.