A group of 7 major Central Banks including USA’s Federal Reserve along with Bank for International Settlement have teamed up to decide how a digital currency would look like.

What is a Central Bank Digital Currency (CBDC) ?

  • It’s a digital equivalent of cash.
  • Just like normal currency, it gives the holder a direct claim on the Central Bank.
  • This will be different from the one offered by private entities as the issuer is a Central bank.
  • As the issuer is the Central Bank, it will be safer and cheaper.

Why needed?

  • Use of cash is coming down and it will offer digital form of Payment for all just like currency or other digital currencies. 
  • The world might be moving to digital currencies and mode of payments and if Central Banks don’t act now they might lose their grip on supply of money and payment systems if private solutions like Facebook’s proposed Libra or Cryptocurrencies like Bitcoin etc

How a Digital Currency works:

  • Digital currencies are intangible and can only be owned and transacted in by using computers or electronic wallets connected to the Internet or the designated networks.
  • As it happens electronically and many times without the need of traditional intermediaries like Banks, transaction costs can be lower.

First Movers:

  • China’s Central Bank – People’s Bank of China (PBoC) – wants to be the first Central Bank to issue a digital currency. It’s aim is to have a first mover advantage and thereby push internalisation of Yuan and reduce its dependence on global dollar payment systems. They are conducting large scale internal testing of a digital wallet application.
  • Sweden’s Riksbank is also testing an e-krona. 
  • Lithuania → Launched its CBDC for limited purpose in July
  • Sweden → Amidst one year long testing for its CBDC

Threat to Dollar’s status as a Global Reserve Currency:

  • Dollar’s status as a global reserve currency is majorly dependent on the fact that the majority of international transactions and trade is denominated in dollars. (You can read more about Reserve Currencies here)
  • If digital currencies take hold, there is a cloud of uncertainty as far as Dollar’s status as leading reserve currency is concerned. 

Who stands where:

  • Bank of Canada, the Federal Reserve, Bank of England → Evaluating the contours of creating and issuing a CBDC.
  • Bank of Japan → Start testing its CBDC next year
  • European Central Bank → working on digital Euro which will be launched by mid-2021.
  • And many other Central Banks are either testing or are planning to launch their CBDCs.

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