Click to learn more about author Stuart Tarmy.
Interest in digital currencies (and, more specifically, cryptocurrency) has risen in the last year, due in part to the interest in touch-free financial transactions caused by the pandemic, rising mainstream business interest in cryptocurrency potential, and the momentum of private initiatives like bitcoin and Facebook’s Diem (previously known as Libra).
At the same time, this rise has also caused more concern by government officials around the world regarding the overall stability of cryptocurrency, fraud potential, and whether the foray of private companies into digital currencies could affect the valuation of a country’s fiat money. Add to that the recent announcement by Visa, MasterCard, PayPal, Goldman Sachs, Blackrock, and others that they’re supporting digital currencies, and it’s clear that digital currencies are entering a new phase.
Currently, about 80% of central banks in 66 countries – including 21 advanced nations – are exploring the issuance of digital currencies. Some 40% have evolved into pilot programs or experiments.
These digital currencies being unveiled around the world aren’t expected to replace current fiat currencies, but according to one European banking official, “The digital euro is not an option, it’s something we just have to do.” BofA Securities, Bank of America’s brokerage division, noted in a recent report that because bitcoin has nearly doubled in price this year and Tesla has purchased $1.5 billion of bitcoin, the best response is using a digital euro as “a pre-emptive response – a crypto kryptonite, a big tech neutralizer.”
Another big challenge being posed by digital currencies is putting into place enough security measures that can guard against fraudulent activities, such as money laundering. While cryptocurrency theft, hacks, and fraud plunged 57% last year to $1.9 billion because of beefed-up security measures, the “decentralized finance services” are now a bigger target of criminals, and hackers are always prowling for weaknesses in the cryptocurrency space.
U.S. Federal Reserve Chair Jerome Powell cautions that while cross-border digital currency (CBDC) has benefits, it also needs to be protected against cyberattacks, counterfeiting, and fraud. Recently, Powell said that cryptocurrencies remain an unstable store of value and as an asset are actually more similar to gold than to the dollar. He added that the central bank is in no hurry to introduce a digital currency competitor, and that he would want the buy-in of Congress and the administration before moving forward. To date, the Fed has not taken these steps of engagement.
Christine Lagarde, president of the European Central Bank, says that while Europeans are turning more to digital to spend, save, and invest, the ECB must ensure that “the euro is fit for the digital age,” by ensuring trust and acting as a guardian. While a decision by the ECB may be imminent on whether to plan for a digital euro, it could be five years or more before it becomes a reality.
China recently began private trials of its digital yuan, the latest effort in governments worldwide creating and adopting digital currencies alongside private initiatives like bitcoin and Facebook’s Diem (previously known as Libra). Recently, the Digital Currency Research Institute at the People’s Bank of China proposed a set of global rules that would monitor central bank digital currencies. Central Bank Digital Currency (CBDC) fund flows need to be “synchronized” to enable regulators to “monitor the transactions for compliance,” the report said.
Here’s a look at what some of the major players are doing in the digital currency arena:
China: While it’s certainly an innovative move by China to institute digitized domestic currency – and it is the first country to do so – it’s also a move by China’s government to ensure control over the country’s cash economy. There are few details about its Digital Currency Electronic Payment (DCEP) project other than it will be driven in part by blockchain technology and sent through digital wallets from their big tech firms such as Alipay from Alibaba and WeChat Pay from Tencent. China’s central bank will monitor currency movements and oversee transactions. Earlier this year the Agriculture Bank of China released the first ATMs for digital yuan transfer.
Japan: Japan doesn’t currently plan to issue CBDC, but it’s obvious it doesn’t want to be unprepared should changes prompt it to reconsider. As a reflection of that sentiment, Japan published recently a “general purpose” paper on CBDC to ensure “stability and efficiency of the overall payment and settlement system.” The paper is aimed at a wide range of end users, including individuals and firms.
Germany: While there is support for digital currencies, it’s clear the government wants to maintain control. The Association of German Banks, seen as the voice of private banks in the country, has thrown its support behind launching a crypto-based digital euro. However, monetary authorities plan to ban Facebook’s cryptocurrency plans in Germany as the government has issued its own blockchain strategy.
U.K.: Like many other countries, the U.K. government knows that digital currencies are innovative – but they also know they need to ensure legitimacy, which could mean a slower rollout. The Bank of England has publicly supported the creation of a digital version of the sterling, and while it’s unclear when CBDC will be available, it’s expected possibly in the next few years. Interestingly, Bank of England Governor Andrew Bailey recently said that he doesn’t believe current cryptocurrency has the “design, government, and arrangements” to become a permanent digital currency.
France: France is making significant steps into assessing whether CBDC is workable, helping contribute to the shared knowledge among EU countries. For example, late last year the Bank of France used a central bank digital currency pilot program to successfully purchase 2 million euros ($2.4 million) worth of simulated shares purchased and sold by investors using a CBDC.
India: The Reserve Bank of India sees the advantage of financial inclusion through CBDC in a country with many remote and poor areas, but is concerned digital currencies could undercut the role of commercial banks in India’s economy. In 2020, the non-profit National Institute for Smart Governance (NISG) unveiled the Central Bank Digital Rupee, a digital currency released on a blockchain. The NISG urged that CBDR be issued by the government and the country’s central bank.
Italy: Italian banks are supportive of the European digital currency – as long as it doesn’t cause them any headaches. The Italian Banking Association expressed its support for a European Central Bank digital currency and was willing to participate in projects and experiments to speed up implementation in Europe. Reasons for its support include growing the number of cross-border transactions, cutting the impact of interest and exchange rates, and trimming the bureaucratic process for payments. But the Italian banks have also made it clear that the ECB better follow the established rules and not conflict with established banking systems.
Brazil: With few COVID vaccines and a surge in coronavirus cases and deaths, there is an even greater push for contactless financial transactions. In 2022, Brazil plans to launch a digital currency that will work in tandem with the instant-payments system.
Canada: It looks like the pandemic may be pushing the Bank of Canada to develop digital currency sooner than it had planned, as cryptocurrencies take off, although policymakers worry about the impact. Still, a digital currency “is by no means a foregone conclusion,” says one central bank official, who admits that while Canada is a leader among peers on development, it lags behind China’s efforts. Canada’s VersaBank has announced it plans to launch a digital currency, VCAD, to be backed by Canadian dollars deposited at the bank.
Russia: In an effort to take a place on the global digital currencies stage – and mitigate the dollar’s worldwide dominance – Russia is keen to make a digital ruble attractive. Russian banks and fintech companies have expressed concern about the extreme centralization of a digital ruble, which they believe could hurt the private sector. The Bank of Russia plans to launch a prototype of its CBDC with a pilot scheduled for late this year. It will give users a chance to test a digital ruble, although it won’t allow real-time transactions.
Indonesia: The general consensus is that while there are benefits to CBDC, the mass adoption of it would take quite some time, especially since the government needs to synch digital currency with other electronic money systems. Indonesia currency law stipulates that all financial transactions must be made in rupiah and the buying and selling of cryptocurrencies is allowed only as investments. They are not allowed to be used as monetary instruments.
The pandemic has wrought many changes in the global economy, and that includes digital currencies. Big tech’s currency offerings and the skyrocketing of cryptocurrencies are running into government concerns over security and currency valuation control. So, while technology will be the key behind the success – and critical reliability – of digital currencies, it is likely to be leading nations such as U.S., the EU, and China that determine how and when the average consumer can actually use digital currencies.