May 4, 2020
“Central Bank Digital Currency” is a new concept for many economies that are trying to explore the potential impact of launching digital currencies in their respective countries. Globally, many countries do not allow their citizens to hold central bank currency in digital form. Through a CBDC, a central bank aims to achieve two main objectives: 1. to eliminate the use of digital cash, and 2. to allow people to directly use central bank cash and deposit money in the respective central banks. Various countries are testing the benefits and cons.
CBDC implementation could be classified into two categories. The first is Retail CBDC, which is launched by the central bank for the public. Retail CBDC would need to be secure, anonymous, and available 24*7. Additionally, the retail CBDC would move the KYC procedures for AML/CFT from the commercial banks to the central bank, which could be both a boon and a bane. Central banks also need to make decisions on whether the digital currency would be token-based or account-based, how they would keep people anonymous, and how they would ensure the data security of people.
The next category is the whole CBDC, which is used by FIs that are holding reserve deposits in the central bank. Wholesale CBDC can be used to improve payments and securities settlement as well as counterparty risks. The impact that wholesale CBDC delivers would include an improvement in interbank payment, improvement in delivery versus payment systems, and removal of the third party in cross-border payment & settlement systems. While the costs of implementation could be higher than the existing systems, developing a DLT could be a challenge and risk of losing information to other authorities such as tax bureaus would mean that the systems will not be anonymous. The central bank will also have to develop the capability of playing the bigger role of a central bank in liquidity and credit risk transformation.
In this article, we take a look at the status of various countries in implementing a Central Bank Digital Currency:
The People’s Bank of China has commenced internal tests for the digital yuan in four cities (Shenzhen, Suzhou, Xiong'an, and Chengdu). Tech Giants in China, such as Alipay and 22 other companies, such as Tencent, Huawei, and China Merchant Bank, are helping with the research.
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