Why it’s time to take central banks’ digital currencies seriously

bitcoins

(Credit: Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Mohit Joshi, President; Head, Financial Services, Insurance, Healthcare and Life Sciences, Infosys Limited & Dixit Joshi, Group Treasurer, Deutsche Bank


  • The introduction of central bank digital currencies could upend the global economic order.
  • This technology could bring multiple benefits, such as more efficient trade, greater financial access for millions of people, and a reduction in crime.
  • But there are still technological barriers to overcome, too.

The decline of cash use in western economies has accelerated due to COVID-19. Meanwhile, central bank digital currencies are emerging, potentially upending the existing global economic hierarchy.

Lockdowns limit physical interactions and naturally reduce physical cash use. But there also credible concerns that paper money can transmit the virus. Research has shown that the average European banknote plays host to around 26,000 colonies of bacteria. The human influenza virus can survive on a banknote for up to 17 days; with one-dollar and five-dollar bills changing hands more than 100 times per year on average, the risk during a global pandemic is considerable.

Who then can blame the People’s Bank of China (PBOC) when it announced in February that it would be destroying cash collected in high-risk environments, such as public transport, markets or in hospitals?

 

In concert with this decision, the PBOC also ramped up its plans to replace cash with a central bank digital currency (CBDC) – the e-RMB. In April, testing began for the e-RMB in several major cities, including Shenzhen, Suzhou, Chengdu, and a new area south of Beijing called Xiong’an. According to state media, the e-RMB has been formally adopted in these cities, with some government employees receiving salaries in the digital currency as early as May. The expectation is that these pilots will extend to the venue for the 2022 Beijing Winter Olympics.

China is not alone. Deutsche Bank Research has tracked almost 20 digital currency projects led by central banks across all regions globally. Meanwhile, the private banking sector has also launched multiple initiatives, such as the R3 consortium, or in India, the Blockchain Infrastructure Company.

The aim for most of these initiatives is efficiency and effectiveness. Digital currencies could remove the cumbersome operational and security apparatus which surround conventional forms of money transmission. Reducing the ‘cost of friction’ can help financial inclusion of individuals, while also making global trade more efficient and less risky. Increasing transparency and traceability can protect against money laundering and other forms of financial crime.

For central banks, the most important benefit is the ability to improve regulatory compliance and the effectiveness of monetary policy. This is particularly important now. It’s difficult, if not impossible, to know if or when monetary policy is having the intended effect on the economy. If such stimuli were executed through a central bank digital currency, its flow through the economy could be monitored precisely, informing future monetary actions.

There are political and social benefits as well. As research by Deutsche Bank shows, first movers in this space could win long-term geopolitical advantage. The potential for China here is immense. If the e-RMB is adopted broadly as a system to streamline trade and reduce risk, China could become the world’s trade banker, as well as its factory. Yet the bigger goal for China is actually more local, and relates to financial inclusion. Digitising the RMB will grant access to financial services to hundreds of millions of citizens, including some of the most disadvantaged. This benefit is something that can be applied to any country across the world.

That said, significant technical and structural barriers must be overcome before any CBDC becomes reality. Described as a ‘tri-lemma’, the challenge is that the underlying blockchain architecture of many cryptocurrencies can be designed to be highly decentralized, secure or scalable – but not all three at the same time. Scalability and security are crucial to the effectiveness of any CBDC, but losing decentralization risks creating other bottlenecks and inefficiencies.

What is the World Economic Forum doing about digital trade?

What is the World Economic Forum doing about digital trade?

The Fourth Industrial Revolution – driven by rapid technological change and digitalization – has already had a profound impact on global trade, economic growth and social progress. Cross-border e-commerce has generated trillions of dollars in economic activity continues to accelerate and the ability of data to move across borders underpins new business models, boosting global GDP by 10% in the last decade alone.

The application of emerging technologies in trade looks to increase efficiency and inclusivity in global trade by enabling more small and medium enterprises (SMEs) to repeat its benefits and by closing the economic gap between developed and developing countries.

However, digital trade barriers including outdated regulations and fragmented governance of emerging technologies could potentially hamper these gains. We are leading the charge to apply 4IR technologies to make international trade more inclusive and efficient, ranging from enabling e-commerce and digital payments to designing norms and trade policies around emerging technologies (‘TradeTech’).

These technical challenges are being addressed by companies such as Infosys, along with many partners in the financial and technology industry. What is clear is that any solution needs to be at once fast, cheap, energy efficient and unbreakable. Privacy and identity must be dealt in a way that is acceptable to governments, citizens and corporations. We need enough transparency to enable the hoped-for leaps forward in efficiency and effectiveness, while still protecting individual and corporate rights to privacy.

This is a tall order – but in a world where digitalization is already transforming our lives, it is by no means impossible. If the last century has taught us anything, it’s not to underestimate the transformative potential of technological innovation.

Important questions remain. How do we manage the disruption a CBDC could create by replicating, and potentially cannibalising, the current banking structure? What if some countries migrate to a CBDC and others don’t? What new power imbalances may result?

The answers are not straightforward, yet the opportunities to strengthen fiscal management, transparency, and efficiency are significant. What is clear is that the crisis of COVID-19 presents many challenges – but also a unique opportunity to rethink how money is managed and used in our society.

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Challenges facing the COVID-19 vaccination campaigns

Civilian deaths in Afghanistan hit record high – UN

Visiting North Korea, UN relief chief spotlights funding shortfall to meet humanitarian needs

Meet Alice, the battery-powered plane that could herald the age of electric air travel

Britain in and out of the EU

Statement by the Brexit Steering Group on UK government White paper

Cocaine and opium production worldwide hit ‘absolute record highs’ – major threat to public health says UN study

Ebola: EU releases additional €3.5 million to tackle epidemic

Voices of young climate action activists ‘give me hope’ says UN chief

European Semester 2019 Spring Package: Commission issues recommendations for Member States to advance sustainable and inclusive economic growth

Easing ‘classroom crisis’ in Côte d’Ivoire, brick by (plastic) brick

The United Kingdom’s decision to leave the European Union will impact young people’s future the most

5 ways COVID-19 has changed workforce management

Parliament to ask for the suspension of EU-US deal on bank data

Coronavirus Global Response: European Commission pledges €300 million to Gavi

Trump’s MAGA policy remains unchanged as EU warns to impose additional retaliation tariffs on US products

European Defence Fund on track with €525 million for Eurodrone and other joint research and industrial projects

COVID-19 creates a perfect storm for the extreme weather season

Healthcare for refugees: a necessary symbiosis of medicine and politics

EU climate law: MEPs want to increase emission reductions target to 60% by 2030

A geared turbofan at Pratt & Whitney's production hub in West Palm Beach (copyright: Pratt & Whitney - a UTC Company- 2018; Source: Pratt & Whitney's website, media center)

The EU Commission approves UTC’s acquisition of Rockwell Collins under conditions

Slovakia and its failure to abide by the European law

How to help an ageing population stay wealthy for longer

Soil pollution ‘jeopardizing’ life on Earth, UN agency warns on World Day

“Beyond the beach: tackling plastic pollution upstream”, a Sting Exclusive by Erik Solheim, Head of UN Environment

Google’s bare truth: Europe’s Chief denies EU accusations but admits they “don’t always get it right”

FROM THE FIELD: Persons with disabilities bike towards sustainability

Our health systems are under pressure. Here are 9 ways to remedy that

Hardware is a cybersecurity risk. Here’s what we need to know

Hatred ‘a threat to everyone’, urges Guterres calling for global effort to end xenophobia and ‘loathsome rhetoric’

What talent means in the post-COVID-19 workplace

What will Germany look like after the next election?

New legislation on transparency and sustainability of the EU risk assessment model in the food chain

This woman changed the world of work – and you’ve probably never heard of her

‘Grave consequences’ await if new deadly escalation of violence in Gaza continues – top UN official

The Dead Sea is drying up, and these two countries have a plan to save it

African elephants under continued threat of poaching, warns UN-backed report

AIESEC Vlog

Four million have now fled Venezuela, UN ramps up aid to children who remain

Ercom, cutting-edge Telco solutions from Europe

As ride-hailing firms drive into the future, who is being left behind?

Syrian crisis: €5.3 billion mobilised by donors for 2021 and beyond at 5th Brussels Conference

Carnage must stop in northwest Syria demands Lowcock, as attacks intensify

New round of bargaining for the 2014 EU budget late in autumn

Sudan: European Union provides €30 million in humanitarian assistance

At last Germany to negotiate the costs for a really cohesive Eurozone

UN evaluates progress in improving peacekeeping performance

The US + Britain trivialize mainland Europe, NATO and the EU

Khashoggi case highlights ‘very worrying practice’ of overseas abductions, says UN expert

What does global health translate into?

How Costa Rica’s environment minister talks to his daughter about climate change

Polluted lungs: health in the center of environment discussion

Here are 3 lessons Europe can learn from China’s flourishing start-ups

Geopolitics and investment in emerging markets after COVID-19

Canada needs to increase foreign aid flows in line with its renewed engagement

EU Ombudsman investigates the European Commission

Coronavirus: EU global response to fight the pandemic

SCADA Security Conference 2017 in Prague, Czech Republic

Brexit: Six more months of political paralysis or a May-Corbyn compromise?

COVID-19 vaccination campaigns and their challenges

More Stings?

Advertising

Trackbacks

  1. […] Why it’s time to take central banks’ digital currencies seriously  The European Sting “china digital currency when:7d” – Google News […]

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s