More central banks look to issue own digital currencies

A rising number of central banks (CBs) are likely to issue their own digital currencies in the next few years, research by the Bank for International Settlements (BIS) showed, as interest in the technology heats up.

Some 20 per cent of 66 central banks surveyed by the BIS said they were likely to issue a digital currency within the next six years, up from around 10 per cent a year earlier. One in ten said they were likely to do so within the next three years.

In all, 80 per cent of central banks said they were looking at the technology, up from seven in ten surveyed last year.

As Facebook’s efforts to launch its Libra cryptocurrency pour fuel onto debates over who will control money in the future, major countries have stepped up the pace at which they are looking at central bank digital currencies (CBDCs).

CBDCs are traditional money, but in digital form, issued and governed by a country’s central bank. By contrast, cryptocurrencies such as bitcoin are produced by solving complex maths puzzles, and governed by disparate online communities instead of a centralised body.

Five central banks, including those in Japan, Britain and the eurozone, said on Tuesday they were joining forces to look at the case for issuing CBDCs. The challenge posed by Libra was likely to have catalysed the move, a former Bank of Japan executive told Reuters.

Before Facebook unveiled Libra in June, central banks had been sanguine about cryptocurrencies, mostly because of their relatively small markets and limited usage by the public.

But the prospect of Facebook’s near-2.5 billion users using Libra, due for launch this year, has stoked worries about the impact of a widely-used and privately-run cryptocurrency on nation states’ control over monetary policy.

Still, the BIS found that only around 10 per cent - all from emerging market economies - have developed pilot projects or started looking at operational or legal questions surrounding CBDCs, suggesting that the technology remains some way off implementation.

“There is no evidence of a widespread or general move to expand this research into experimentation and pilot arrangements,” it said.

Of the central banks surveyed by the BIS, around a third were from advanced economies and the remainder from emerging markets.

Those from emerging economies tend to have a stronger motivation to issue CBDCs that can act as a substitute for or complement to bank notes, the BIS said, partly because of concerns over the efficiency and safety of payments using traditional cash.

The Hong Kong and Thai central banks said they had moved closer to using CBDCs to make cross-border payments more efficient. The Hong Kong and Thai central banks have moved a step closer to being able to use central bank digital currencies (CBDCs) to make payments between the two countries more efficient, the banks said on Wednesday.

The Asian banks’ work, part of a project begun in July, comes a day after the central banks of Britain, the eurozone, Japan, Sweden and Switzerland said they would jointly study the case for digital currencies.

The People’s Bank of China has progressed the furthest with CBDCs, and the head of its digital currency research institute, Mu Changchun, told a public forum in August that its project was “almost ready”.

The Chinese project focuses on payments within China, unlike the Hong Kong and Thai initiative. Many central banks are looking into the potential for CBDCs - money but in digital form. They differ from cryptocurrencies like bitcoin, which are produced by solving complex maths puzzles and governed by disparate online communities instead of a centralised body.

Previous studies have largely focused on the technical challenges of using CBDCs for cross-border payments. Wednesday’s report concentrated on practical issues like foreign exchange pricing and the effect on liquidity.

The two banks said they had successfully built a prototype system that allowed banks in the two countries to use a CBDC to transfer funds and make payments between themselves, potentially cutting layers out of typical existing processes. The work was “an important first step to solve the pain points of low efficiency and high costs in traditional cross-border payments,” said Edmond Lau, senior executive director of the Hong Kong Monetary Authority (HKMA). But the two banks have not set a time for a real transaction, Colin Pou, executive director at the HKMA, told a media briefing in Hong Kong.

The project could be expanded to include other central banks, or linked with other, separate initiatives, Pou added.

Reuters