IBM: 38% of Central Banks Now Trialing Digital Currencies
Central banks are exploring the possibility of issuing their own digital currencies, as blockchain technology rapidly evolves.
IBM Blockchain and the Official Monetary and Financial Institutions Forum (OMFIF) jointly launched a research report on October 26, 2018, with a focus on central bank digital currencies (CBDCs).
The institutions polled a total of 21 central banks worldwide, finding that 38% of them are now researching and trialing wholesale CBDCs. The majority of banks believed that it’s necessary to issue wholesale CBDCs to bring down the credit risk, ensure the stability of the token’s value, and remove the liquidity risk by issuing more tokens.
What Is a CBDC?
A central bank digital currency refers to a type of digital asset issued by a central bank, which is used for payment and settlement. According to the report, “Retail CBDCs would be used by all people and companies, whereas wholesale CBDCs can be used only by permitted institutions as a settlement asset in the interbank market.”
Wholesale CBDCs have the potential to bring about significant improvements in the speed, efficiency and resilience of payments, while simplifying and lowering costs in the current payments system.
Central Banks Take Lead in Trialing CBDCs
According to the report, many central banks—including the South African Reserve Bank, Bank of Japan, Bank of Canada, Bank of Thailand and Monetary Authority of Singapore—have already started working on trials for DLT-based real-time gross settlement (RTGS) systems.
However, 61% of central banks reckon that blockchain technology may not be necessary, seeing that the emerging technology is still in its early stages and entails few efficiency gains. 76% of respondents said “it is uncertain whether DLT will be able to deliver on its promise, especially in areas such as regulation.”
Policy and Regulatory Issues
Most central banks thought that wholesale CBDCs should be issued only by central banks. In this way, a wholesale CBDC could be regarded as a fiat currency, entailing limited impact on monetary policy. Yet around 8% of respondents stressed that “a wholesale CBDC would have an impact on monetary policy.”
According to the report, policy concerns mainly refer to “financial stability and the implications of widening access to central bank accounts.”
Jesse Lund, Vice President of IBM Blockchain, shared his views on CBDCs. “Bitcoin introduced blockchain and DLT to financial services. On the one hand, it demonstrated that information technology and social readiness for autonomous payment systems have matured to a tipping point. On the other, the social movement behind Bitcoin has perpetuated a mistaken idea that banks are no longer necessary actors for secure global money transfer. Similarly, central banks play an essential role in managing monetary policy, which should not be displaced by distributed autonomous organizations.”
Philip Middleton, Deputy Chairman of OMFIF, is also open to CBDCs. “In the wholesale domain, the prospects for digital payment or electronic token exchange appear capable of delivering significant benefits while avoiding most of the difficulties inherent in retail CBDCs.”
As a brand-new currency and payment system, CBDC has massive growth potential. It is bound to have a positive impact, not only for consumers, but also in terms of monetary policy, regulation, the financial industry and even the digital economy of the future. However, the blockchain technology supporting CBDC is still in its early stages and has many challenges in store. A lot of work still needs to be done assessing the viability of introducing a digital fiat currency.