Question

What are the main reasons for a Central bank to introduce a digital currency? (something finding form data and website, 500 words to be detailed, could include tables and charts)

Answer 1

A Central Bank Digital Currency (CBDC) is the digital form of a country’s fiat currency that is also a claim on the central bank. Instead of printing money, the central bank issues electronic coins or account backed by the full faith and credit of the government. CBDCs are the liability of the central bank, which means the government must maintain reserves and deposits to back it up, rather than a private bank.

There are lots of reasons, depending on the economic situation within a country. Here are just a few according to the IMF:

· The cost of managing and transferring cash is high and this technology can reduce expenses.

· Financial inclusion means those who are unbanked can get easier and safer access to money on their phone

· Private companies need competition so they meet transparency standards and limit illicit activity

· Monetary policy can flow more quickly and seamlessly through CBDCs.

· A well-designed CBDC can increase the ability of the issuing central banks to conduct monetary and credit policy and promote financial stability, consumer protection, financial inclusion and cross-border payments.

Overall, there are four major reasons why many central banks will launch CBDC over the next decade.

Cross-border payments and digital identity

To Facebook’s credit, unlike central banks it recognized that digital money is not about digitizing money. Digital money is about digitizing identity. This applies to CBDC, too. In fact, the greatest benefit of retail CBDC will be in accelerating the build out of a coherent, national and global internet based digital identity infrastructure. This is when CBDC as a concept will start to deliver on the vision of peer to peer electronic cash.

Financial inclusion

Unlike commercial banks, central banks are like public utilities. A few central banks might print money and bail out billionaires every few years, but none exist to make money. Therefore, in general there is little reason for a central bank to offer accounts directly to customers. The Central Bank issued digital currency can leverage the private currency framework to foster this inclusion. To begin with, a CBDC has to have universal acceptance. Second, it should be easy-to-use and reduce costs. Third, it should also be interoperable with other payment methods as well as other such digital currencies.

Financial stability

Financial stability is about preventing the financial system from becoming unstable and thus causing financial distress for consumers. Unlike cash and reserves, a CBDC will allow a central bank to become the lender of last resort for households and small businesses rather than for billionaires and banks. In a financial crisis, this will allow the central bank to bail out consumers instead of corporations, which in turn will reduce the incentives for mega corporations to borrow too much. That, in turn, will reduce aggregate national debt and improve financial stability.

Consumer protection

The last thing governments want is for people to use Facebook’s libra or magic privately issued internet money like IOTA. First, if you don’t depend on the government’s money, the government has a lot less power over you than Facebook does. Second, if you do use magic internet money or Facebook’s money, the government still has to worry about how you will vote when you lose your keys or say when the founders of IOTA shut down the whole network leaving you to carry your bags. CBDCs can mitigate these risks by providing a sound domestic internet based payments system for a wide range of consumer applications including gaming, paying for online content, electronic payments, device to device micropayments and so on.