This archive report was first published on 22 October 2019.
Central Banks' Digital Currency Dilemma ¶
Published on October 22, 2019
Central banks, once dismissive of digital currencies, are now racing to develop their own versions. This shift in attitude is largely driven by Facebook's proposal for Libra, a digital currency that has raised concerns about national sovereignty, privacy, and financial stability.
Libra, a stablecoin pegged to the US dollar, aims to facilitate everyday transactions for Facebook's two billion-strong user base. This has prompted regulators to reevaluate their stance on digital currencies, with some central banks experimenting with their own versions.
China, Sweden, the Bahamas, and other countries have been actively exploring digital currencies, with some claiming their coins will be operational soon. In contrast, the US Federal Reserve is watching from the sidelines, citing concerns about cybersecurity and demand for such a currency.
Central banks are considering two main approaches: wholesale and retail. Wholesale projects would limit access to banks and financial institutions, aiming to speed up and reduce the cost of payment flows within the existing financial system. Retail projects, on the other hand, would issue digital currencies directly to the general public, potentially requiring central banks to assume responsibility for customer due diligence and anti-money laundering requirements.
Some central banks, such as the People's Bank of China, are making significant progress in developing their digital currencies. The PBOC has been researching the topic for five years and claims its digital currency is 'close to being out.' Other countries, like Sweden and Uruguay, are also exploring digital currencies, with the South African Reserve Bank studying the feasibility of creating a digital currency.
While digital currencies offer potential advantages, such as faster and cheaper money transfers across borders, they also raise significant technical and regulatory challenges. If central banks can overcome these hurdles, digital currencies could improve access to legal tender in countries where cash supplies are dwindling and offer safer places for retail investors to save.
