Original note published in High Level
After most central banks rejected the concept of cryptocurrencies for a variety of reasons, from security concerns to impact on the monetary system, Now many of these institutes are very interested in creating their own digital currency.
Specifically, 60% of the world’s leading central banks are conducting experiments or feasibility studies to develop a digital currencyThis is the result of a study by the International Settlements Bank (BIS).
Although this study was published in January of this year, it did not receive much media attention and the key findings of this increasing central bank commitment to digital assets stand out.
Interest in these projects grew significantly. In 2019, 42% of banks said they were already testing or experimenting, while in 2020 (the year the last survey was conducted) nearly six in ten were already testing not to physically make their own currency .
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Meanwhile, 14% of central banks are moving towards development agreements and pilot programs for digital currencies. Almost three quarters of the institutes surveyed have such an interest in issuing a digital currency.
“Unsurprisingly, these general trends encompass wide variations between jurisdictions and economic types. In addition, the intensification of the work of a digital central bank currency (CBDC) does not prejudice the political decision on the introduction of a CBDC, but shows great interest, ”the BIS said in the report.
Central banks can have one or more mandates: The most important is to maintain the purchasing power of the residents of their countries (this is achieved by controlling inflation).while others are also charged with driving economic growth. What they all have in common, however, is that they issue the notes and coins that people, companies and institutions use to conduct their daily business.
65 central banks took part in this BIS study, representing 72% of the world’s population and 91% of global economic growth. 21 banks are from advanced economies and 44 from emerging markets, including Mexico.
The main motives of central banks to develop a digital currency are to improve payment efficiency (access to money while the use of cash decreases) at the local level and to improve their security. However, if we split preferences between industrialized and emerging countries, interests change.
For central banks in emerging markets, for example, financial stability and payment efficiency are becoming more important. Most of all, these developing countries see digital currencies as a means of promoting financial inclusionas many of its residents do not have a bank account but could use digital money through a mobile device.
Financial stability and payment efficiency are becoming more important for the central banks of the emerging markets / Image: Depositphotos.com
Regarding regulation, the outlook is still uncertain. Only a quarter of the central banks surveyed have the legal authority to issue a digital currency, while 48% say the legal framework is still uncertain while 26% say they have no authority to place an intangible asset on the market.
The majority (60%) see it as possible to bring a digital currency to the public in the medium term, ie between 1 and 6 years. This is a big jump compared to 2019, when less than 40% thought it was likely or possible to spend a coin in the same period.
Competition for cryptocurrencies?
Not necessarily. Although cryptocurrencies like Bitcoin or Ethereum have risen sharply since 2020, the central banks see them as a niche product that cannot yet be massively used by the public.
In the meantime, stablecoins (Stablecoins) are checked by most monetary authorities. According to the survey, two-thirds of central banks are studying the effects of stablecoins on monetary and financial stability.
In June 2019, Facebook presented its project to the public for a stablecoin called “Libra” that would be backed by financial assets to avoid volatility and with which payments can be made. The social network’s claims to issue its own currency met with widespread opposition from governments, financial and monetary authorities. At the moment the project has been renamed “Diem” and it is not known if the company will launch it anytime soon.
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Although competition with the most popular cryptocurrencies is not in the goals of the monetary authorities, there could be an interest in countering their influence on transactions and preventing them from one day replacing fiat money and undermining the authority of the monetary authorities.
“Newcomers and private” crypto currencies “carry the risk of replacing the privately issued” crypto currencies “with fiat currency in certain transactions. According to the European Central Bank (ECB), this in turn is Potentially weakens the role of central banks in the economy, their ability to control monetary policy and the possible prevention of financial crime, “says the payment system company Swift in a study.
Although concerns that cryptocurrencies will replace money as a means of payment are not central banks’ motivations, the need to create digital currencies that coexist alongside the banknotes and coins of the financial system is already a reality. All that remains is to know which central bank will launch your investment first.