With the decline in the use of physical cash, the world’s central banks are working fast to create digital versions of national currencies. What implications does this have for the world of finance?
In the face of the COVID-19 pandemic, there has been a dramatic shift in the way many people around the world are approaching financial transactions.
Concerned about virus transmission, many consumers and businesses have moved away from paper money towards electronic payments.
In effect, though, the payment trend accelerated by COVID-19 has already been under way for a number of years, spurred by major advances in electronic payment systems.
Rather than using cash, consumers are preferring to use their mobile phones to tap and pay for just about everything.
This is why a large number of central banks around the world are leveraging technologies to fast-track the development of digital versions of official national currencies.
Once launched, central bank digital currencies (CBDCs) – fully backed, administered and regulated by their respective national governments – are expected to greatly reduce the number of physical bank notes and coins that need to be manufactured and kept in circulation.
CBDCs will also be going head-to-head with the plethora of unregulated and volatile cryptocurrencies already in operation, such as Bitcoin and Ethereum.
In a recent report on the development of CBDCs, the Swiss-based Bank for International Settlements (BIS) notes that over the next three years, central banks collectively representing a fifth of the world’s population are likely to issue their own general purpose digital currencies.
Among the nations well advanced in CBDC testing is China, which is developing a digital version of its yuan. Also right up there in the digital currency race are the US, Japan, the UK and Canada, as well as the European Union.
“As a whole, central banks are moving into more advanced stages of CBDC engagement, progressing from conceptual research to practical experimentation,” says Codruta Boar, from BIS’s monetary and economic department.
“Around the globe, interest in CBDCs continues to be shaped by local circumstances. In emerging markets and developing economies, where central banks report relatively stronger motivations, financial inclusion and payments efficiency objectives drive general purpose CBDC work,” Boar says.
