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Bank of Korea Says No Urgent Need for CBDC

Bank of Korea Says No Urgent Need for CBDC

South Korean news agency The Korean Herald reported today that the nation’s central bank has said it has no plans of issuing a digital currency in the near future.

Cryptocurrency has taken center stage in many financial institutions around the globe and has found its way into major economic discussions in recent times, this includes the World Economic Forum held in Davos. However, South Korea’s major financial institution has for now chosen to distance itself from the whole shift to digital currencies.

After research conducted by the Bank of Korea on central bank digital currency (CBDC) regarding the possibility of issuing a cryptocurrency that is backed by the central bank or the government, it concluded that there is no urgent need for such implementation. The report was aimed at gathering legal and social data for the effective implementation of CBDC.

Citing an unnamed bank official, the bank said: “We have no plans to issue any type of CBDC that is available for all people in the near future.” It appears that while plans to issue a CBDC is on hold, the bank will continue to research the space and gather more information such as cost implications and benefits. The bank official further said: “We have to work further on the benefits and costs of CBDC implementation first.”

A number of banks have been considering a CBDC for a while now. Most central banks have come up with reasons why they wouldn’t support such innovation claiming the tech has yet to live up to the hype, however, a few have gone ahead to issue theirs.

Mixed feelings surrounding the concept of a national cryptocurrency have been in play for a while now. The Bank of Thailand wants to use a CBDC for internal bank transactions. Speculations surrounding Iran’s national currency as primarily to evade sanctions from the US. Last month, the US Federal Reserve was of the opinion that implementing a CBDC would be out of naivety. Meanwhile, the Bank of England has over time warmed up to the idea of a CBDC after claiming cryptocurrency had failed as both a store of value and a medium of exchange.

Regardless, one thing is certain, banks are settling for the idea of replacing current banking systems with distributed ledger technology, especially to reduce human error and improve transparency. The possibility of a digital currency from there shouldn’t be quickly dismissed.

 

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CBDC Report Identifies Cross-Border Payment Practicalities

A joint research report conducted by three central banks has concluded that Central Bank Digital Currencies (CBDC) have the capacity to upgrade cross-border payments and settlements.

Hypothetical proposals

Titled Cross-Border Interbank Payments and Settlements: Emerging Opportunities for Digital transformation, the paper was collaboratively authored by the Bank of Canada (BOC), Bank of England (BoE) and the Monetary Authority of Singapore (MAS). With them, a number of experts from commercial banks “led by HSBC”.

Specifically, the research project the proposal for three possible models to address issues and achieve what it calls “future-state capabilities”; these are the desired outcomes which have been gathered from research into “challenges and root causes of issues associated with cross-border interbank payments and settlements”.

Appraising the limitations of technological innovations within this space, the report acknowledges present initiatives that are taking place that “go some way” to address obstacles. However, it describes these as “incremental changes” and in order for a long-term solution to be established, there “may need to be a more fundamental paradigm shift” which are “enabled by new technology platforms”.

A study from IBM and the Official Monetary and Financial Institutions Forum (OMFIF) recently revealed that central banks have been exploring and trialing CBDCs with “mixed results”.

W-CBDCs

There are two types of CBDCs; firstly the “retail CBDC” which is designed for public use, and secondly “wholesale CBDCs”, which are limited to financial institutions and markets.

The report offers two approaches based on legacy models with one referring to the collection of initiatives currently underway or in the making and a second which is based on the expansion of real-time gross settlement (RTGS) operators roles for cross-border settlements, eliminating intermediary banks.

Weighted approach

A third model comes with three nuanced variations and focuses on the utilization of wholesale central bank digital currencies (W-CBDCs) for this process.

The first of the W-CBDC models is one that can only be “transmitted and exchanged only within their home jurisdictions”. This would require commercial banks to open wallets across multiple central banks should they desire to hold a number of currencies. The second broadens the scope a little further by suggesting for a W-CBDC that can operate “beyond their home jurisdictions”. For commercial banks, this would entail adopting multiple wallets within their respective central banks, and would require “each central bank to support multiple CBDC tokens”.

Finally, the third variation is ideal yet ambitious, and suggests a universal W-CBDC, “backed by a basket of currencies and accepted by all participating jurisdictions”. Conclusively, the report found the first jurisdiction-specific model offered few benefits as they are simply tokenized versions of existing models.

The other models that do not limit the scale of the system are, however, solid options to reduce counterparty credit, settlement and payment risks; also broadening access to RTGS systems. That said, the report identifies all of the W-CBDCs models as having particular drawbacks including not performing to present standards and that they “degrade” existing governance frameworks.

In discussion

The concept of CBDC’s has been around for some time, however, now it appears as though there is significant potential on the horizon, as a few nations around the world such as Thailand begin to embark on the CBDC journey.

This is also not the first time that the BoE or BOC have spoken publicly about CBDCs. Furthermore, Managing Director of the International Monetary Fund (IMF) Christine Lagarde recently gave a speech in Singapore on the matter, highlighting the several positives that can be drawn from this new fintech frontier.

 

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IMF Urges Consideration of National Crypto: Harness Benefits, Manage Risks

Reaffirming an open stance to the versatile application of blockchain technologies and digital currencies, International Monetary Fund (IMF) Managing Director Christine Lagarde has furthered the discussion surrounding the prospect of central bank digital currencies (CBDCs). She said that they should be considered and urged further discussion about the potential roles of central banks.

Speaking at the Singapore Fintech Festival on  14 November 2018, Lagarde opened up to the audience about the disruptive nature of technological change and said: “The key to is to harness the benefits while managing the risks”.

Crypto-race

In her speech, she noted three areas for her address: the evolving nature of money and fintech development, central bank roles in the new financial landscape, especially regarding CBDC, and an examination of downsides and steps toward mitigation.

Noting the larger names in the space such as Bitcoin, Ethereum and Ripple, Lagarde believes that cryptocurrencies are seeking a firm position in the “cashless world” and are “constantly reinventing themselves” as they hope to seek more legitimate grounds through stable values, as well as cheaper and faster transaction settlements.

CBDCs

According to Lagarde, e-money providers consider themselves to be less risky than banks due to the fact that they do not lend money and that cryptocurrencies are seeking to “anchor trust in technology”. However, she remains skeptical and retains the belief that “proper regulations of these entities will remain a pillar of trust”.

Lagarde published an article earlier this month (November 2018) that established the case for regulations that don’t stifle innovations, offering a balanced argument for and against cryptocurrencies.

After revealing the latest IMF paper named Casting Light on Central Bank Digital Currencies, one that covers the pros and cons of the concept, Lagarde said, “We should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy.”

Key points

Firstly, she argued that CBDCs may offer “great promise” in the area of financial inclusion; at their core, cryptocurrencies are capable of reaching any corner of the globe with a computer and an internet connection, thus providing rural areas populated with individuals and businesses with a robust financial tool. Efforts to connect unbanked rural areas to the national financial network are already underway in the Philippines.

Secondly, she discusses digital currency in the context of security and consumer protections; suggesting that just as the introduction and subsequent dominance of cash (paper and coins) provided a low-cost and widely available solution, digital currencies can also do so.

She said: “Regulation may not be able to fully redress these downsides. A digital currency could offer advantages, as a backup means of payment. And it could boost competition by offering a low-cost and efficient alternative — as did its grandfather, the old reliable paper note.”

Lagarde sees digital currencies as having a third potential benefit which is privacy, though she also argues that banks would not be ready to offer a fully anonymous digital currency due to it creating a “bonanza for criminals”.

Lastly, she lists three downsides to CBDCs: Financial integrity risks, financial stability, and risks to innovation, areas that have also been questioned by other institutions around the world including the Bank of England.

Conclusively, Lagarde looks optimistically toward the future and “more fundamentally”, retaining an open mind to change. She said, “In the world of fintech, we need to harness change so it is fair, safe, efficient, and dynamic.”

 

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Marshall Islands President Survives No-Confidence Vote over National Crypto

The president of Pacific nation Marshall Islands has survived a no-confidence vote from the parliament in the wake of her intentions to launch a national cryptocurrency.

The move came after the President Hilda Heine suffered a backlash after promoting a central bank digital currency (CBDC) model cryptocurrency to replace the current fiat system. As part of its arrangement with the United States, Marshall Islands uses the US dollar and in return, USA provides security and other measures.

Heine was opposed to the US having this much monetary control and resorted to the idea of a nationalized cryptocurrency called the Sovereign (SOV) back in February that could be used alongside the USD.

However, after the IMF warned Marshall Islands over this move, lawmakers from the country’s legislature became apprehensive regarding the move and the move for a no-confidence vote was submitted. Critics, including former president Casten Nemra, believed the move would tarnish the reputation of the country in the international community.

Nemra also caused political rifts to deepen following a corruption scandal regarding a USD 1 billion compensation paid by the US for citizens affected by nuclear tests carried out near them. With this deep division of confidence on her leadership, Heine probably breathed a sigh of relief after the vote came 16-16 tied, falling just one short of the required number to force her resignation.

But on the downside, the digital currency SOV initiative doesn’t have a clear mandate now. Progress may continue but will likely be slower and will warrant further checks from the legislature and other stakeholders. The government is also looking to fulfill the requirements of IMF and the European Union regarding the new currency.

 

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