Monetary systems worldwide, rooted in fiat currency with the USD entrenched as the reserve currency, are watching digital-currency contenders enter the ring. Central banks, eager to control their nations’ money supplies and chip away at the USD’s dominance, are weighing the risks and benefits of unleashing their own digital currencies.
Central Bank Digital Currencies (CBDCs)
The ECB has begun analyzing the possibility of issuing a digital euro, but would that be a good idea? To achieve success, the central bank will need to carefully assess the risks and benefits of a CBDC in the eurozone and address each in the design process; otherwise, the new digital euro could introduce more problems than it solves.
When bitcoin, the first cryptocurrency, was birthed in 2008, few envisioned it becoming legal tender. But it did, in September 2021, in El Salvador. The Central American country is on a growing list of emerging markets embracing cryptos and CBDCs as preferred currencies due to their many benefits, blazing the trail for global acceptance.
Digital payments promise greater convenience and efficiency with lower cost but also carry substantial potential risk to the economy at large. The long-term success of this innovation will depend on the development of a top-down, holistic regulatory framework to securely govern digital payments, maximizing benefits while minimizing risks.
Digitisation has strengthened the trend toward a cashless system, with central banks exploring the feasibility of central bank digital currencies. Spearheaded by The Bahamas with its release of the sand dollar, many central banks are in various stages of releasing their own cryptocurrencies. Although China is the dominant leader in CBDC development, other central banks are catching up. CBDCs share some of the attributes of popular cryptocurrencies but not all.
Digital currencies are proliferating around the globe, with even the bigtech players such as Facebook jumping in. What about central banks issuing their own central bank digital currencies? Many central banks are weighing the advantages and disadvantages of CBDCs so as to minimize disruption. More recently, six central banks announced that they will work jointly on this issue with support from the BIS, which shows the increasing focus on cross-border implications.