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After cryptocurrencies, the wave of digital banking is expected to revolutionize ideas about money and how it is managed.
In October 2020, the Bahamas introduced a new type of digital currency, the Bahamian dollar. Central bank digital currencies issued from the Bahamas are legal and have the same legitimacy as old-fashioned cash notes and coins. The Bahamian dollar is in the category of cash, but it has no physical form. Today, Bahamians can download an e-wallet on their mobile phones, top up Bahamian dollars and simply spend it with the push of a button.
Although only two countries, the Bahamas and Nigeria, have introduced such central bank digital currencies, many other countries are experimenting with digital currencies, including China and the Eastern Caribbean Monetary Union.
In addition, 100 other countries are exploring the idea, particularly the United States, where the Federal Reserve last January issued a discussion paper on digital currencies issued by the central bank, taking into account what they have and what they have.
This is an interesting moment in the course of currency development, and recent years have seen a boom in what are known as digital currency assets, such as Bitcoin. Today, companies are innovating with less risky alternatives, including the so-called fixed digital currencies, and countries are conducting their surveys on digital central bank currencies.
These operations are likely to be accompanied by a renewed continuation of fierce competition with two of the most common forms of money today, cash and bank deposits. Accompanying this evolving landscape is the promise to facilitate international payments, improve access to microcredit and reduce transaction costs, but there are many major risks to avoid.
Money itself has come a long way since its evolution, from beads to gold coins, notes and credit cards. At the beginning of the twentieth century, commodities were the support for national currencies, but this is no longer true. its value is supported only by the word of the government. Hence, with the advent of the role and use of computers, electronic payments have become a common phenomenon.
Recent years have seen a surge in the activity of digital currencies, issued privately and secured by cryptography, to form decentralized assets that enable peer-to-peer transactions, without intermediaries such as banks. Since the launch of Bitcoin in 2009, an estimated 14,000 different types of digital currencies have been issued, with an estimated market value of $ 2.3 trillion by the end of 2021. However, they are highly volatile, often unacceptable, and have high transaction costs.
Such volatility in digital currencies has generated interest in stable currencies, typically issued by a specific party, such as a payment operator or bank, and attempts to offer a fixed price, by linking their value to fixed assets, such as the US dollars or gold. There are many stable cryptocurrencies with fluctuating margins of stability with steady growth, but unlike cryptocurrencies, they have the potential to become global payment instruments. Central bank digital currencies can be seen as a new type of fixed digital currency, which expands the framework of digital access to central bank reserves, making it available to the general public, rather than being limited to commercial banks.
Central bank digital currencies can combine the digital nature of banking transactions, and peer-to-peer transactions with cash, but there are many questions that arise about how digital central bank currencies work in each country. Will the money live in the bank, or will it become more like cash, taking the physical form of digital currencies? Will central bank digital currencies pay interest rates, as bank deposits do?
On the other hand, there are many benefits to central bank digital currencies as they have the ability to make payment systems less cost effective, competitive and flexible. It will also, for example, reduce the cost to the state of dealing with real cash.
Central bank’s digital currencies also help to improve cross-border payments, which currently rely on multifaceted banking relationships and create long, slow and expensive payment chains that are difficult to detect. It is also mentioned that a number of countries have large numbers of people who do not have bank accounts, and these do not have access to loans, interest and other money and payment services. But there are also many risks, the most prominent of which revolve around everyone’s decision to own several digital central bank currencies, and suddenly withdraw from banks.
Banks will then have to raise interest rates on deposits, or impose higher interest rates on loans. There is also the issue of fewer people getting the money, which will slow down the pace of the economy. Also, if central bank digital currencies reduce the cost of holding and transactions in foreign currencies, countries with weak financial institutions, inflation rates or volatile exchange rates may assist, while consumers and companies abandon the principle of wholesale sales of local currencies.
There will always be ways to overcome these obstacles. For example, central banks may offer lower interest rates on central bank’s digital currency assets than other forms of central bank liabilities, or simply distribute digital central bank currencies through existing financial institutions. .
Today, institutions are rushing to introduce new laws and regulations, including all of these emergencies, and suggesting how to deal with new forms of money, such as deposits, bonds, and commodities. For example, the government watchdog Financial Action Task Force has amended anti-money laundering and anti-terrorist financing standards in light of virtual assets, and the Basel Committee on Banking Supervision has issued a paper on the possibility for banks to exercise prudent exposure to digital currencies. The International Monetary Fund is working on the issue and provides relevant independent analysis. Everyone will need to think fast and be ready to take action.
Central banks will have to emulate Apple or Microsoft, to keep central bank’s digital currencies at the forefront of technology, and in users’ wallets, as money may be transferred in entirely new ways in the future, including automatically via chips found in everyday products is embedded. This will require a lot of technical redesign and a variety of currency types. Regardless of the form that money takes today, whether in the bank, in your wallet and your phone, expect the near future to look completely different.
* Financial Advisor and Director of Monetary and Monetary and Capital Markets Division at the International Monetary Fund
Translation: Faten Sobh