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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Cryptocurrencies, stablecoins and central-bank digital currencies are all the rage. We break down what they are and what you need to know about them

Bitcoin logo mural
A bitcoin artwork by Stacey Coon, Anastasia Sultzer, and Nanu Berk at the Bitcoin 2021 convention.

  • Cryptocurrencies and stablecoins have boomed in 2021, sucking in investors.
  • The world’s central banks are increasingly looking to create their own digital currencies.
  • Insider cuts out the jargon and explains the key differences and what they’re used for.
  • See more stories on Insider’s business page.

Cryptocurrencies and stablecoins have boomed in 2021. And central banks around the world are increasingly keen on their own digital currencies. But how do they all work and what are they used for?

Cryptocurrencies

Cryptocurrencies are basically digital currencies that aren’t controlled or issued by a centralized authority, such as commercial or central banks.

These coins are sent back and forth on enormous peer-to-peer networks – essentially groups of computers that share data.

The innovation of cryptocurrencies is that the “ledger” that keeps track of transactions – known as the blockchain – is overseen and verified by network users known as “miners.” Miners collectively do the work of a central authority, checking people aren’t trying to spend coins twice, and earning newly created bitcoin in return.

“What we aim to do with the blockchain is to make this ‘trustless’ so that nobody has overall control of it,” says Ben Edgington, a software developer for the ethereum network. “It’s fully democratic [and] it’s fully accessible.”

Bitcoiners say it’s ‘digital gold’

When bitcoin was launched by the anonymous person or group Satoshi Nakamoto in 2008, many thought it could be used for payments. In reality, it’s way too volatile.

Now, many bitcoiners say its scarcity – only 21 million coins can be mined – means it will hold its value and protect investors against inflation. Others say it’s purely speculative.

Other cryptocurrencies have different uses. The ethereum network, for example, can be used to build applications like collectible “non-fungible tokens.

Cryptocurrencies are highly risky

In bitcoin and other networks that follow its model, miners verify transactions by using large amounts of computing power to solve complex math problems. Bitcoin’s mining system uses as much electricity annually as medium-sized countries. Other cryptocurrencies are less energy intensive.

Cryptocurrencies are largely unregulated and are some of the riskiest investments out there. Bitcoin has plunged around 50% since its April record high of close to $65,000.

Stablecoins

Wild volatility has been a huge deterrent for some investors as it can make crypto harder to use. That’s where stablecoins come in. Stablecoins maintain a “stable” value with a peg to other assets, like the dollar.

For example Tether, the third-biggest cryptocurrency by market cap, is designed to be pegged to the US dollar. It is backed by assets such as dollars and Treasury bills.

Traders love stablecoins

Interest in stablecoins has shot up too. They’re central to cryptocurrency trading, by allowing investors to easily move in and out of more volatile assets like bitcoin.

Stablecoins are also commonly used in the world of decentralized finance – a booming ecosystem that lets people create financial products without the need for central authorities.

Regulators are worried

But they’re facing heavy scrutiny. In May, the Federal Reserve’s Lael Brainard raised concerns stablecoins could default and destabilize the financial system. New York also banned Tether trading after an investigation found it had overstated its US dollar backing.

As with the rest of the cryptocurrency world, a lack of regulation means investors have almost no protection if their stablecoin suddenly collapses.

Central bank digital currencies

Countries are trying to find ways to make it easier to spend and send money – and keep control of payment systems that are increasingly private (think PayPal or Visa). A digital currency issued by central banks directly to consumers could be the answer.

Right now, private banks and payment companies are the most important players in the everyday use of money. But a central bank digital currency (or CBDC) would be a digital version of banknotes and coins, letting people hold and make payments in central bank money.

China is currently leading the pack out of the world’s big economies. But the European Central Bank and the Bank of England are seriously looking into it.

CBDCs could make payments safer

CBDCs could speed up transactions for individuals and big institutions, Chris Giancarlo, founder of non-profit Digital Dollar Project, told Insider. The DDP plans to test CBDCs in real-world situations.

“If you can send a photograph to Japan in a second, why can’t you send money in a second?” he said.

Central bankers also think CBDCs can make the financial system safer. Although unlikely, even a big global payment system could feasibly collapse.

Some bankers are concerned

One concern is privacy. Some governments may design CBDCs so transactions are anonymized, like cash, but others won’t. Privacy questions have arisen over China’s trial digital yuan.

“With a CBDC, the government would have direct access to all your spending patterns,” Bobby Ong, co-founder of data firm CoinGecko, says.

Some bankers are worried CBDCs could remove them from key parts of the financial system. CBDCs could reduce the demand for commercial bank accounts and cut banks out of the business of verifying transactions, although central banks are working on the details.

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Japan’s plans for a digital yen could start to take shape next year, according to a top lawmaker, report says

japanese yen
  • The head of the ruling party’s digital currency initiative told Reuters digital yen plans could take shape next year.
  • He said he expected this to provide clarity on its impact on the existing financial system.
  • The Bank of Japan started exploring a central bank digital currency earlier this year.
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Japan’s plans for a digital yen could start to come together next year and the design of a potential central bank digital currency will be clearer then, the head of the ruling party’s digital currency initiative, Hideki Murai, told Reuters in an interview published on Monday.

“By around the end of next year, we’ll have a clearer view of what Japan’s CBDC would look like,” he said, adding this would not necessarily lead to a clear-cut decision on whether to roll out a central bank digital currency (CBDC). The Bank of Japan launched its exploration into a CBDC earlier this year and is currently researching and assessing the concept.

Murai also said having a better picture of the digital yen’s design would provide insight into how it might impact the existing financial system and institutions in Japan, which is currently undergoing significant shifts.

Private businesses have taken on responsibilities that previously fell to commercial banks, such as online settlement means, which have put the two industry groups at odds with one another. A digital yen could reverse the shift and commercial banks could benefit from this, Murai said.

“CBDC has the potential to completely reshape changes occurring in Japan’s financial industry.” he commented.

The Bank of Japan has previously said a CBDC would not significantly impact private businesses.

Murai also said the Bank of Japan would have to ensure the digital yen is compatible with CBDCs from other countries, to ensure it stays competitive against the Chinese digital yuan.

The Federal Reserve and the European Central Bank are currently among those banks researching the potential for a CBDC, while China is trialling a digital form of its currency in various cities around the country, before rolling it out nationwide. The country began to develop the digital yuan as early as 2014 and has said it might make the CBDC available to international visitors during the 2022 Winter Olympics in Beijing.

If China fully rolls out its own CBDC, this could threaten demand for the yen, Murai said in the interview.

“If a digital yuan becomes so convenient it’s frequently used by tourists or becomes a main settlement means for trade, the relationship between the yen and yuan could change,” he said.

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Emerging markets could be the next big frontier for crypto. A slew of politicians want to follow El Salvador and adopt bitcoin as legal tender.

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  • Emerging markets are pioneering digital and crypto currency usage, trading and mining.
  • Since El Salvador voted to adopt bitcoin as legal tender, a slew of politicians have said they want to follow suit.
  • Many showed their support through tweets or by adding the symbolic laser eyes to their Twitter pictures.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Cryptocurrencies can often stir up concern among conservative investors and few are as conservative as central banks, and regulators are definitely skeptical. But this does not appear to be the case in emerging markets.

Politicians, central bankers and regulators across the developed world might be a little wary, but those in the emerging world are pushing the boundaries of crypto adoption, by pioneering how digital tokens are used, traded and mined.

In fact, they could become crypto’s next big frontier, as a slew of politicians from Brazil, and Argentina and even Tonga have publicly stated that they want their countries to follow the example of El Salvador in making cryptocurrencies legal tender.

El Salvador’s Congress approved a law last week that made the small Central American country the first to accept bitcoin as legal tender, giving it equal status to the US dollar in El Salvador.

“Other countries will follow El Salvador’s lead for two main reasons, making bitcoin legal tender will attract Bitcoin entrepreneurs and ease the burden of sending money internationally.” Edward Moya, senior market analyst at OANDA told Insider.

Indeed, since El Salvador’s president Nayib Bukele first announced the bitcoin bill, a slew of other emerging markets politicians have said that their own countries should follow suit.

Paraguayan congressman Carlitos Rejala tweeted “This week we start with an important project to innovate Paraguay in front of the world! The real one to the moon #btc & #paypal”.

Gabriel Silva, a congressman from Panama said his country could not afford to be left behind and a broader adoption of crypto was necessary for the country to attract technological innovation and entrepreneurship.

Brazilian politician Gilson Marques and the Argentinian Francisco Sánchez were among those who added laser eyes, a symbol used by bitcoin bulls, to their public profile pictures.

Central banks around the world are considering launching their own digital currencies that would be centrally managed and regulated – a key difference to existing cryptocurrencies like bitcoin.

The Federal Reserve and European Central Bank are still in the very early stages of looking into a digital currencies, while many emerging-market central banks are making fast progress in the area.

“Their use in small-scale trading and remittance transfers from workers abroad are among the main reasons for the popularity of crypto currencies in EM. Central bank digital currencies (CBDC) could also facilitate getting social transfers to the poor and improve transparency of the large informal economy. These channels could be positive for economic growth in EM.” a recent Bank of America research note said.

The popularity and value of crypto currencies like bitcoin and ether has boomed over the past year. They’re both an asset class in their own right, as well as a means of payment for goods and services. Various sports teams like the Dallas Mavericks or Oakland A’s for example accept cryptocurrencies as payments for tickets or merchandise.

In El Salvador, a whole town was already running on crypto – El Zonte, also known as ‘Bitcoin Beach’. Soon the whole country could now be working in similar ways and, if some politicians get their will, other emerging markets countries could as well.

El Salvador’s decision has however been received cautiously by regulators and politicians in developed markets. Bank of England Governor Andrew Bailey said just this week that cryptocurrencies are too volatile to be used as a payment form.

And the World Bank rejected El Salvador’s request to help with the implementation of bitcoin over environmental concerns linked to crypto mining. Further, regulators have shown concern about the use of crypto to fund illicit activities.

Bitcoin is already up by 300% in the last 12 months and, if more countries adopt it, it should stand to gain even more, even though regulators are tightening their scrutiny of the market, analysts said.

“Bitcoin becoming legal tender in other countries should support the bull case for bitcoin,” OANDA’s Moya said.

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Central bank digital currencies could use networks like ethereum, China’s former digital yuan chief says

Digital yuan red envelope
A consumer uses a digital yuan red envelope in a mobile phone to buy goods at a digital yuan cashier’s desk

Yao Qian, the former head of China’s digital yuan team said central bank digital currencies could use blockchain networks like ethereum in the future, Sina Finance reported on Monday.

At the International Finance Forum 2021 Spring Conference in Beijing, Yao said CBDCs would likely become more “smart” and could include functionalities and attributes that extend beyond those of physical currencies.

This could take the form of smart contracts, which are programs that document, control and execute agreements or transactions, Yao, who is currently the director of the Science and Technology Supervision Bureau of China’s Securities Regulatory Commission, said. Terms and conditions are written onto blockchain ledgers and contracts are self-executing, trackable and irreversible. They also cut out third parties and allow any two parties to enter agreements, even anonymously, which is one of the things that makes them popular in the crypto sphere.

Smart contracts require blockchain networks like ethereum, which could be used by central banks as an additional layer to their digital currencies. This would allow users to access CBDCs without having a bank account for example, Yao said. This would improve financial inclusion, which is widely regarded as one of the main goals of CBDCs.

So far, the digital yuan has been developed in collaboration with banks and other financial institutions. In the two-tiered system the e-yuan follows, the central bank disseminates the digital currency to commercial banks, which are then responsible for passing it on to consumers. This however means that users need an account, or to be registered with an existing bank or authority to gain access to the new digital currency.

Trials of the digital yuan began earlier this year across China and are set to roll out more widely in the future. By 2022, China hopes to trial its CBDC with international visitors and athletes at the Beijing Winter Olympics.

Yao however also urged caution. Smart contracts may be vulnerable to security issues and their legality is still questionable as the technology is new and has not been used by the wider public yet, he said. Under his approach, central banks would therefore start with simple contracts and make sure any kinks in the system are resolved before using blockchain technology for more complex transactions, Yao said.

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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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A non-profit will launch 5 pilot programs over the next year to test the viability of a central bank digital currency in the US

Federal Reserve
Photo taken on Nov. 5, 2020 shows the U.S. Federal Reserve in Washington, D.C., the United States.

  • The non-profit Digital Dollar Project will launch five pilot programs to test the viability of central bank digital currencies in the next 12 months.
  • The initiative is backed by a partnership between Accenture and the Digital Dollar Foundation.
  • CBDCs are digital versions of a banknote.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The non-profit Digital Dollar Project will launch at least five pilot programs to test the viability of a US central bank digital currency, or “digital dollar”, in the next 12 months, the organization announced Monday.

The initiative – backed by a partnership between Accenture and the Digital Dollar Foundation – was created last year to look into the potential advantages of CBDCs in the US.

CBDCs, digital versions of banknotes, are meant to be more instantaneous and seamless thanks to digital processing. Americans at this point can currently only hold central-bank-issued money in physical coins and notes.

Among others goals, the Digital Dollar Project aims to explore, analyze and identify technical and functional requirements of CBDC, assess benefits and challenges, and consider potential use cases for both retail and wholesale commercial utilization.

It will release its findings for use in academic study, as well as policy consideration by Congress.

“The US doesn’t need to be first to the central bank digital currency, but it does need to be a leader in setting standards for the digital future of money,” J. Christopher Giancarlo, former chairman of the US Commodity Futures Trading Commission and co-founder of the Digital Dollar Foundation, said in a statement.

The Federal Reserve in 2020 partnered with the Massachusetts Institute of Technology to research CBDCs. The US central bank is still being cautious, though, with Fed chair Jerome Powell saying last week that it is “far more important” to get it right than to do it quickly.

“Central bank digital currencies will play an important role in how we modernize our financial systems,” David Treat, a senior managing director at Accenture, said in a statement. Treat leads the company’s blockchain and multi-party systems practice globally.

Accenture has made an initial investment to support the initiative’s operational requirements and intends to match the funds necessary to launch the first five pilot programs.

To date, a number of central banks have been exploring CBDCs spurred by the cryptocurrency momentum that has rapidly risen as of late.

China is leading the race, after developing its digital currency electronic payment CBDC in 2014 and testing a pilot in 2020.

Norway in April announced it will start testing various solutions for a CBDC as the world’s most cashless country moves to further decrease cash transactions. The UK in the same month said it is coordinating exploratory work on a potential CBDC, dubbed “britcoin.”

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Cryptocurrencies will survive the rise of central bank-backed digital coins, but their use will likely decline, Deutsche Bank says

bitcoin
  • Cryptocurrencies will survive, but their use may be limited by central bank digital currencies, Deutsche Bank said.
  • The report says cryptocurrencies will become stronger and more usable in everyday life the longer they exist.
  • Once CBDCs are commonplace, their advantages could outweigh those of cryptocurrencies, the report said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Cryptocurrencies aren’t going anywhere in the coming years, but their usage will probably decline when central bank digital currencies (CBDCs) are eventually rolled out, according to Deutsche Bank International Private Bank.

Currently, cryptocurrencies like bitcoin are not a mainstream asset class, but it will become more robust over time, Christian Nolting, Deutsche Bank’s global chief investment officer, wrote in an introduction to a special report.

“The longer cryptocurrencies survive, the more robust and credible they become due to network effects (Metcalfe’s law). Once we see some stability in terms of price fluctuations, the use of cryptocurrencies for the exchange of goods and services goods could increase,” the report said.

Whether this will become reality depends on the rollout of CBDCs and factors such as regulation, environmental impact, security issues and transaction speed, Deutsche Bank said.

Whilst most major central banks are examining the possibility of launching their own digital currencies, China and Sweden are two of the few who have started trials. The US Federal Reserve and the European Central Bank are yet to decide whether to launch their own digital coins.

Deutsche Bank argues the longer central banks take to deploy their own digital currencies, the more scope existing cryptocurrencies will have to establish themselves. As most CBDCs are still at the very early stages of development, this could be a long time coming, but will have a significant impact when their use does become mainstream.

“A widespread introduction of CBDCs accompanied by higher regulation of cryptocurrencies could create a more challenging environment for crypto assets as some (but not all) of their advantages compared to traditional financial assets would fade in the longer term,” the report concludes.

Key differences between cryptocurrencies and CBDCs include the levels of centralization, regulation, oversight, encryption and transparency, Deutsche Bank said.

CBDCs vs Crypto
The key differences between Central Bank Digital Currencies and Cryptocurrencies as outlined in the Deutsche Bank report.

“My belief is that governments and more digitally-aware populations may ultimately prefer to go with CBDC, at least for general use, at the possible expense of some cryptocurrencies,” Nolting said in the report. “If this happens, then the more successful cryptocurrencies are likely to become increasingly differentiated in terms of business models and utility,” he continued, highlighting a potential future path for crypto investments.

The report also urged caution against treating cryptocurrencies as an equivalent to gold in terms of diversification and risk management. Deutsche Bank said the high volatility and low liquidity of cryptocurrencies were key concerns.

Despite this, the incorporation of crypto assets into existing investment vehicles like ETFs may attract more retail and institutional funds into the sector as it makes investments easier, the bank said.

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