The adoption of central bank digital currencies is ‘inevitable’ – though the US still has 2 problems to overcome, says Bank of America

The Eccles Building, location of the Board of Governors of the Federal Reserve System and of the Federal Open Market Committee, June 2, 2016 in Washington, DC.
The Eccles Building

  • The adoption of central bank digital currencies is “inevitable”, according to Bank of America.
  • However, the US needs to solve two problems: how to include unbanked Americans and dealing with retail transfers across borders.
  • “Central banks have the power and the will to prevent a very bad outcome,” the analysts said.
  • See more stories on Insider’s business page.

The adoption of central bank digital currencies is “inevitable” due to numerous apparent advantages, according to Bank of America, though the US still needs to overcome several challenges before there can be an effective rollout of a digital dollar.

Among the many upsides of well-designed CBDCs, according to economist Ethan Harris and currency strategist Athanasios Vamvakidisthere, one stands out: their almost instantaneous transactions at minimal costs no matter where in the world.

This was highlighted during the pandemic when stimulus payments went out to the bank accounts of millions of struggling Americans. A transfer via check would have been too slow while one via credit card would have been too costly.

Still, the US must overcome two problems before a CBDC can be successfully rolled out, according BofA analysts.

First, it must figure out how to include around 5% of American households that do not have bank accounts and the roughly 21% that do not have credit or charge cards. Once the US has its CBDC, these individuals could be locked out of participating.

Second, it must work out if “digital wallets” are indeed the answer to expensive retail transfers across borders, especially with 3% of the adult population in the US not owning cell phones and 15% not owning smartphones.

Still, central banks will likely be moving along two tracks going forward, the analysts said, which are improving the current payment system and developing new methods of payment.

“Central banks have the power and the will to prevent a very bad outcome,” the analysts said. “They are not going to throw the baby out with the bathwater, but will retain control of the payments system and minimize the disruption to the flow of credit.”

The analysts also said they are concerned that if CBDCs for major currencies are available internationally, these could “erode the monetary sovereignty of smaller countries.”

After all, CBDCs, particularly one backed by the US, in some ways are superior to bank accounts as a store of value, particularly during times of crisis, they said.

CBDC is a type of central bank liability – similar to the US dollar – issued in digital form, which could be used by the general public. It will have the full backing of the central bank although could be managed by designated private financial institutions.

Around 56 central banks are developing or considering digital currencies, according to the Bank for International Settlements, with China leading the race as it gradually rolls out its e-RMB.

The Fed for its part in May revealed that it has taken further steps in exploring a digital currency and will be releasing a discussion paper this summer outlining its thinking on digital payments.

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Central bank digital currencies could be necessary for digital innovation and competition, Bank of Canada says

crypto wallet
  • Central bank digital currencies may be needed to maintain digital competition, Bank of Canada says.
  • CBDC adoption would also boost innovation and increase welfare, the bank said in a research note.
  • Central banks in the US, the EU, China and elsewhere are researching or trialling CBDCs.
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Central bank digital currencies (CBDCs) could be necessary to ensure innovation and competition in digital economies, the Bank of Canada said in a research paper published on Tuesday.

As the economy becomes more and more digital, several issues have emerged that could be addressed through CBDCs. These include problems linked to competition in sectors like payment options, a resulting lack of innovation and development or exploration of new technologies, and an increased risk of market power abuse by large financial bodies as cash becomes less relevant in society.

Introducing a CBDC could address these issues in a more effective way than regulations and policies would, according to the Bank of Canada.

“In general, a CBDC as a basic outside option for payments could discipline the market,” the paper said. “Further, as a competition tool, a CBDC might be simpler than developing new competition policies in the complex and changing environment of big tech, and simpler than attempting enforcement via lengthy and uncertain legal battles,” it continued.

CBDCs could also make the use and further development of technologies like smart contracts and programmable money easier as their framework could be made available for public use and therefore create common ground for innovation.

Finally, CBDCs could also protect and even boost welfare levels, according to the Bank of Canada. The potential emergence of new markets and applications could increase welfare, while the added protection of consumers against market power abuses would prevent welfare from declining, the report said.

The Bank of Canada has not yet decided whether to pursue the development of a CBDC, and is currently in the process of researching and assessing its options.

The US is at a similar point in the process of potentially creating a digital dollar. Earlier this year, Federal Reserve Chair Jerome Powell said the central bank was still exploring the potential of a CBDC and would publish a report this summer. Last week, the European Central Bank also said it was launching a two-year exploration into a possible digital euro.

Elsewhere, CBDCs are at more advanced stages – China for example has started trialling the digital yuan in various cities and is now using the collected data to make adjustments. The country has also said that international visitors might be able to use the CBDC during the 2022 Winter Olympic games in Beijing.

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Bitcoin is speculative, bad for the planet, and often used for crime, the Bank for International Settlements says

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Central banks are keeping a close eye on bitcoin.

  • Bitcoin is a speculative asset that is used for crime and is bad for the planet, the BIS has said.
  • The international organization said bitcoin has “few redeeming public-interest attributes.”
  • Regulators and central banks are paying increasing attention to bitcoin and cryptocurrencies.
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Crypto tokens such as bitcoin are speculative assets rather than currencies, are often used for crimes such as money laundering, and waste energy, the Bank for International Settlements has said.

Bitcoin “has few redeeming public interest attributes,” the BIS said on Wednesday, in a chapter of its annual economic report. The BIS is an international organization that acts as a central bank for central banks and aims to foster global financial cooperation.

“By now, it is clear that cryptocurrencies are speculative assets rather than money, and in many cases are used to facilitate money laundering, ransomware attacks and other financial crimes.”

The report continued: “Bitcoin in particular has few redeeming public interest attributes when also considering its wasteful energy footprint.”

Research by Cambridge University has found the bitcoin network – which is secured by vast amounts of computing power – uses around the same amount of energy each year as the Netherlands.

Regulators and central banks are paying more and more attention to cryptocurrencies, which they broadly see as dangerously volatile. Earlier in June, a top banking regulator, based at the BIS, advocated for the toughest possible rules for banks holding crypto.

Wednesday’s BIS report looked at the case for central bank digital currencies, and also took aim at stablecoins and the growing dominance of a select few tech firms over digital payments.

“Innovations such as cryptocurrencies, stablecoins and the walled garden ecosystems of big techs all tend to work against the public good element that underpins the payment system,” it said.

The report said stablecoins – crypto tokens that are backed by reserve assets – “have the potential to fragment the liquidity of the monetary system.” But it said their reliance on traditional assets means they’re “not a game changer.”

The BIS said the growing dominance of a few tech firms is perhaps the biggest danger to the safety and smooth functioning of global payment systems. It said the firms’ rising market power could keep costs high, cause data protection issues, and freeze some people out.

Central banks are increasingly working on their own digital currencies. Although these projects have coincided with the crypto boom, central bankers say they are more concerned about private payment systems becoming too big to fail.

Huw van Steenis, chief advisor to the CEO of Swiss bank UBS, told Insider in May: “If you think about the pandemic, it’s probably fast-forwarded the shift away from cash to digital by about three to five years.”

He added: “No central banker ever wants to feel they might lose control of their currency.”

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The use of central bank digital currencies would fuel demand for other crypto assets, study shows

A woman takes a photograph on her mobile phone of artwork by Andy Warhol called Dollar Sign.
A woman photographs ‘Dollar Sign’, a 1981 art piece by Andy Warhol.

  • The establishment of digital currencies by central banks would encourage wider demand for crypto assets, according to a study by the Economist Intelligence Unit.
  • 59% of study respondents held that view of influence by central banks on digital assets.
  • China is running a pilot digital program and the Fed has stepped up efforts around a digital dollar.
  • See more stories on Insider’s business page.

Digital currencies established by central banks would stoke wider demand for crypto assets, according to an Economist Intelligence Unit study, which comes as central banks including the Federal Reserve have been stepping up work in this area.

59% of study respondents agreed that the launch of digital currencies by official monetary authorities would lift up use of other forms of digital currencies and assets that are not backed by governments. The EIU study, commissioned by crypto exchange platform Crypto.com, posed the question to 200 institutional investor and corporate treasury management officials between February and April.

A central bank digital currency, or CBDC, is a type of central bank liability – like the US dollar – issued in digital form.

Meanwhile, 78% of the institutional and corporate survey takers consider the issuance of CBDCs as necessary to establish a functioning market for new financial instruments, such as digital bonds, to supplement the role of cryptocurrencies.

“If people get used to central bank money that is digital-they have access to central bank money in a digital format-that obviously makes them more comfortable to use other digital currencies,” Henri Arslanian, the crypto leader at PwC, one of the world’s largest auditing and financial services firms, was quoted as saying in the EIU study.

Central banks are “late to the race” in digital adoption but they still carry influence in such matters, the study said.

On tap for central banks, Federal Reserve Chairman Jerome Powell recently said the Fed plans this summer to publish a paper on its thinking about digital payments as the bank advances its efforts in potentially creating a digital dollar. The Chinese government has launched a pilot program centered on a digital renminbi and the UK said it’s coordinating exploratory work on a CBDC dubbed “britcoin.

In Sweden, the central bank in April was moving toward testing with banks a so-called e-krona. The Bahamas became the first country to launch a digital version of its fiat currency with the October 2020 launch of the digital Sand Dollar.

The EIU study found that 74% of respondents believe their countries are or will become cashless.

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Central banks aren’t running scared of bitcoin but they want to keep control, says former Bank of England digital guru

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The Bank of England is looking into launching a “Britcoin.”

  • Central banks are increasingly interested in creating digital currencies as the use of cash falls.
  • But central banks aren’t threatened by bitcoin, says former Bank of England advisor Huw van Steenis.
  • The top banker spoke to Insider and punctured some central bank digital currency myths.
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In some ways, central bankers are like the “bitcoin bros” who have sent cryptocurrencies soaring in 2021, although they might not like to think it.

While crypto fans have taken to Twitter to shout about their gains, there’s been a quieter – but no less important – surge in interest in digital currencies in the hushed offices of the world’s central banks.

The Bank of England is weighing up launching a “Britcoin”; China is racing ahead with trials of its digital yuan; and European Central Bankers are giving speech after speech on central bank digital currencies, or CBDCs. The Federal Reserve is taking things more slowly but has enlisted MIT researchers to explore the issue.

Huw van Steenis was formerly a top advisor to the governor of the Bank of England and is now senior advisor to the CEO of Swiss banking giant UBS.

A well-known figure in the City of London, he wrote the Bank of England’s 2019 future of finance report, which looked hard at the outlook for payments and the pros and cons of central bank digital currencies.

Van Steenis is clear-eyed about CBDCs, arguing that they sometimes seem like “a solution in search of a problem.” But he told Insider they are definitely about central banks keeping control of money.

A CBDC would be a digital version of banknotes and coins, letting people hold and make payments in central bank money. At the moment, the digital money people use every day is created by commercial banks and held in accounts or on pre-paid cards.

Central bankers are watching cryptocurrencies closely

Some analysts have argued that central banks have been spurred to action by the crypto boom, and fears that bitcoin could become a global payments system. Bank of America researchers posited in March that CBDCs could be “kryptonite for crypto.”

Van Steenis thinks differently. “Approximately 95% of the money in most Western markets is not actually central bank money, but it’s money held in the bank in deposits in electronic format,” he says. “The world is already one in which [central banks] play a pivotal role, but they don’t dominate.”

The real issue is ensuring the stability of the financial system, van Steenis says, and that means keeping an eye on cryptocurrencies.

Yet the crypto world is still tiny relative to the amount of money in bank deposits, he says. “So I don’t think they’re running scared on bitcoin. But what they want to know is, is there an innovation they need to adapt and borrow from.”

The key concerns are dwindling cash use and tech-firm dominance

A major worry for central bankers is that, as the use of cash dwindles, private payment systems are becoming increasingly crucial and could shake the global financial system if they fail.

“If you think about the pandemic, it’s probably fast-forwarded the shift away from cash to digital by about three to five years,” van Steenis says. “No central banker ever wants to feel they might lose control of their currency.”

A CBDC would ensure everyone has access to a risk-free payment system, proponents argue, and would make transactions safer and more efficient. Just like going directly to the airline for your plane tickets online is faster and easier than going to see a travel agent.

Many central banks around the world are also asking themselves whether they want huge US technology companies like Visa, Mastercard and PayPal to dominate their national payments systems, van Steenis says.

Another common argument is that Western central banks are racing to keep up with China’s advanced CBDC project, which they say could threaten the dollar’s dominance.

But van Steenis is skeptical. “I just don’t see the geopolitical angle is what’s driving it,” he says. “If you ask the Swedes what’s driving the e-krona, it’s much more about a reduction in cash and inclusion and their responsibility to provide to society, than it is because they’re trying to keep up with friends around the world.”

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Huw van Steenis, pictured here in 2007, has worked at the top of investment and central banks.

CBDCs could eat the banking sector’s lunch

Whatever’s pushing it forward, the creation of central bank digital currencies looks set to throw up a number of problems to accompany the benefits.

One concern for bankers is that the technology might eat the financial sector’s lunch. The technical term is “disintermediation” – the idea that giving people access to CBDCs could stop them from needing banks at all.

Van Steenis, who knows Wall Street and the City well, says CBDCs must be created with a two-tier system in which people continue to hold accounts at banks and payment firms.

Yet, he says there are other risks. “What happens when we think about money being moved from country A to country B? Do you then allow your monetary base to be sent to a foreign bank? In which case, how do you regulate them? Do you lose control of your monetary policy?”

Crypto community can innovate while central banks are cautious

These sorts of issues mean central banks and the governments that ultimately control them will be very cautious about building CBDCs, says van Steenis. Countries will need to debate their pros and cons in a process that might take years, he added.

Fed Chair Jerome Powell said in March that the central bank would “move with great care and transparency” and wouldn’t proceed without support from Congress.

That opens the door for others to innovate, van Steenis says, not least those in the crypto world who are developing stablecoins and attractive financial networks.

He says: “Actually, I think the crypto community does have a real window of opportunity to help define a future whilst the central banks are cautiously, but studiously, trying to progress what they do.”

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