The UK may just have changed the digital currency game
Most major central banks, including the RBA, are slowly rushing their explorations of digital currencies, in large part because they recognize the potential of digital currency to transform their financial systems, and not always in a good way.
The trends in major financial systems to abandon cash and e-money and e-payments on private platforms provide the underlying rationale for their interest, but the speed at which China is changing and the implications of it. a large currency issued by a central bank used for international payments increased this interest.
China said its focus for e-yuan was primarily related to its domestic use – China has subdued its large e-commerce companies, like Ant Group, due to the scale of their private payment platforms. within its financial system and their proximity. – reserves of guarded customer data – but it is also testing international use.
This, in the long run, could be part of an ambition to erode the dominance of the US dollar over the international financial system and business transactions (although China denies it) and reduce China’s vulnerability to US financial sanctions. imposed by the hegemony of the dollar.
Bitcoin and other cryptocurrencies pose less of a threat to central banks. Their prices are volatile (Bitcoins fell 15% last Sunday) and therefore are not good stores of value or medium of exchange, but rather speculative mechanisms.
Nonetheless, their potential for use in criminal activity and money laundering means that their growing acceptance is of concern to central banks and their governments.
Facebook suffered a backlash from regulators to its initial plan to issue a stable coin, Libra (renamed Diem), as it was also seen to have longer-term potential to undermine central bank control over policies. monetary and be used for nefarious purposes.
The RBA (along with over 60 other central banks) has been interested in digital currencies but, like the US Federal Reserve, which has a joint project with the Massachusetts Institute of Technology to value the dollar issue digital, has taken a cautious approach. and somewhat skeptical approach.
In an article published last year, the RBA said that, given the benefits and risks of introducing a digital currency, there did not appear to be a strong public policy rationale for issuing it. here.
Introducing a CBDC is not as simple as simply replacing cash with electronic money, especially in an already sophisticated and relatively efficient financial system like Australia’s.
This could slightly improve the efficiency of the payment system and, perhaps, the effectiveness of the implementation of monetary policies, but it would also have implications for the structure of the financial system, financial stability and the role of banks. and other financial intermediaries.
It is also true that most “currencies” in Australia are already in digital form, with cash being only a fraction of the money in circulation and most of the money is in the form of balances recorded in the currency. electronic databases within large banks.
Much of the central bank’s discussion of digital currencies revolves around whether, if they were to issue them, they should be at the wholesale level – issued to banks and other financial institutions – or at the sell level. retail, where they would completely replace physical currency.
Even with limited issuance at a wholesale level, there could be risks as the central bank would interact with a much larger group of external institutions and this could impact bank deposits – their main source of funding. – and systemic stability.
The most interesting and exciting option would be the commercial version, with the central bank issuing the currency and recording and verifying transactions or issuing the CBDC to private sector institutions.
The latter is favored by the RBA, as banks already have the systems in place to attract customers, keep records of their transactions, and comply (or attempt to comply) with anti-money laundering requirements. , counterterrorism and other regulatory requirements.
The risks, especially during any period of financial stress, would be that savings would come from banks and other intermediaries and would be held as CBDCs, primarily with the central bank. With Australian banks reliant on deposits for around 60 percent of their funding, any “rush” on a bank could have some pretty dramatic and destabilizing implications for the system.
The RBA and other central banks are concerned about the potential for disintermediation of their systems.
In addition to the increased potential for breakdowns on financial institutions, the potential impact on the cost and margins of banks’ funding and their ability to perform their credit assessment functions pose a threat to the stability and efficiency of the system. There is also, of course, the potential for fraud and cybersecurity more broadly linked to the move to a fully digital currency.
It seems inevitable that the developed world will eventually move to CBDCs in response to what China and others are doing, including cryptocurrencies, tokens and stable promoters issued or created by the private sector. The steady decline in the use of cash alone would lead to change.
The mantra for most of the major central banks, including the Fed, the European Central Bank and the RBA, is, however, “not yet at this time”.
If the UK – one of the world’s major financial centers – were to act, however, it would almost inevitably force their hand.
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Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and associate editor and senior columnist at The Australian.