Central banks must start issuing digital currencies in the coming years because cash will become irrelevant, UBS chief economist says

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  • Central banks need to issue digital currencies as cash will become outdated, a UBS chief economist said.
  • These digital currencies won’t operate like cryptocurrencies and will have no wild swings in value, Paul Donovan said.
  • The supply of an officially backed coin depends on a central bank’s authority to regulate the currency’s spending power.
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Central banks will soon need to issue digital currencies as the use of cash slowly becomes irrelevant, according to UBS chief economist Paul Donovan.

“Central bank digital currencies are likely to start becoming part of individual economies’ payment systems in the coming years,” he said in a note published this week.

People are using physical forms of money, like notes and cash, much less than before. Moreover, about half of Sweden’s banks no longer accept cash and its economy is expected to go cashless by 2023.

“We wave debit cards and mobile devices around with the reckless abandon of a first year student at Hogwarts trying out a wand, magically paying for things without ever having to touch cash,” Donovan said, referring to the boarding school in the “Harry Potter” series of children’s books.

Donovan laid out specific differences between how CBDCs would operate compared with cryptocurrencies. CBDCs would be interchangeable with notes and coins in circulation, accepted for tax payments, and wouldn’t have wild fluctuations in value – unlike typical crypto, such as bitcoin. Officially backed digital currency supply could change depending on the central bank’s ability to regulate the spending power of the currency, he said. Meanwhile, cryptocurrencies are decentralized and cannot be controlled by any one party.

He also said digital cash is a direct claim on the private bank to which its account is tied, and not on the government. This means government-produced money is becoming less significant, while digital money produced by the private sector is increasing in importance.

“If central banks want to stay relevant as cash becomes less relevant, they might have to consider entering the world of digital money,” he said.

China is among the leading economies looking closely at CBDCs. The People’s Bank of China aims to become the world’s first to issue a digital currency as part of a push to reduce its reliance on the dollar-denominated financial system, according to Reuters.

Federal Reserve Chairman Jerome Powell said last month a potential digital dollar is a “high priority” project for the US. But he thinks CBDCs should exist alongside cash and other forms of money, rather than replace them entirely.

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Fed Chair Jerome Powell says central bank-backed digital currencies must coexist alongside cash and other forms of money

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Jerome Powell.

  • Fed Chairman Jerome Powell said potential central bank digital currencies must coexist with cash.
  • COVID-19 has brought forward the need to address the limitations of current payments, he said.
  • Achieving an improved payments system would require multiple stakeholders to collaborate, he said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Federal Reserve Chairman Jerome Powell said on Thursday prospective digital currencies issued by central banks must accompany cash and other types of money within a flexible payment system.

“A recent report from the Bank for International Settlements and a group of seven central banks, which includes the Fed, assessed the feasibility of central bank digital currencies (CBDCs) in helping central banks deliver their public policy objectives,” Powell said in prepared remarks at a payments conference hosted in Basel, Switzerland.

“One of the three key principles highlighted in the report is that a CBDC needs to coexist with cash and other types of money in a flexible and innovative payment system.”

The COVID-19 crisis has underscored the less systematic areas of the current payment system and sped up the need for digitalization, he said. The Federal Reserve Bank of Boston is said to be collaborating with MIT researchers to explore digital currencies in addition to experiments the Fed’s board of governors is conducting.

Powell was addressing attendees at a conference aimed at discussing improvements in cross-border payments hosted by the Committee on Payments and Market Infrastructures.

“By definition, cross-border payments involve multiple jurisdictions,” he said. “So it will only be through countries working together, via all of the international forums-the Group of Seven, the G-20, the CPMI, the FSB, and others-that solutions will be possible.”

He said that achieving an improved payments system would be made possible through the combined engagement of policymakers, private-sector participants, and academia.

Powell recently said that a potential digital dollar is a “high priority” project for the US, although that comes with notable technical and policy-related issues. As the issuer of the world’s reserve currency, the US doesn’t have to be the first to create one, but it does have to get it right, he said.

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