Category Archives: Central Bank Digital Currencies

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CBDC

Central Banker: CBDC Flexible Tool for Zero-Interest Rate World

CBDC

Mario Marcel, Chile’s central bank governor, has backed the central bank digital currency (CBDC) by saying that it can help alleviate the challenges of “unconventional monetary policies” while providing additional flexibility.

Acknowledging Bitcoin’s disruptive potential and benefits over the legacy system, Marcel said: 

“Disruptive technologies in Finance or ‘FinTech’ are transforming the financial industry landscape, challenging traditional business models. These technologies have been able to address some gaps in the conventional financial industry that can be grouped into five categories: Access, Speed, Cost, Transparency, and Security.”

Marcel also argued that the new technology could be taken up by the banking system to mitigate the disruptive potential as well as leverage advantages of the distributed ledger technology (DLT). 

He also backed DLT and CBDC in “enhancing market efficiency” and noted that they could be particularly helpful for crisis management around the Zero Lower Bound. 

Marcel added that CBDCs could help central banks in giving out more intervention tools while reducing the risk of bank runs. Balance sheets on a transparent ledger can simplify unwinding of troublesome financial institutions and divestment of assets, he noted. 

But while Marcel agrees that CBDCs do not need a blockchain, he concluded: “Monetary policy channels in a world with CBDCs may be faster and more powerful.”

Central Bank Digital Currencies or CBDCs are expected to play a big role in the future of digital coinage as countries look to end dependency on the never-ending interest quagmire.

 

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Romanian National Bank: Crypto Won’t Fulfill Basic Roles of Currency

Romanian National Bank_ Crypto Won’t Fulfill Basic Roles of Currency

“Cryptocurrencies won’t replace the currency issued by central banks,” says an official of the Romanian National Bank, Daniel Daianu, as reported by news outlet Business Review.

In a conference on Tuesday, Daianu who was more pro digital currencies issued by central bank than decentralized currencies emphatically talked about the important roles of state-backed institutions such as the banks and other financial institutions, and how even though technologies have been instrumental to the functions of these institutions, they need not necessarily replace them. He said:

“We must be aware of the difference between institutions and the roles they have. It is important for these roles not to disappear. Of course, technologies ensure business models and they have always done so.”

In his opinion, the fintech industry has in no small way helped financial business processes, and that this is part of market segmentation; each component of the market compartmentalized to function in its capacity to aid the overall market objective. However, in the light of innovative technologies like the blockchain and cryptocurrencies, there is a need for distinction.

“Blockchain and cryptocurrencies are financial assets, not cryptocurrencies,” he said, suggesting that since these instruments cannot be seen as bank replacements. In his reasoning, “currency is always backed by a last-resort lender”, adding that in the market, “the state is the only possible last-resort lender”. This reechoes Aviya Arika’s (Chief of Blockchain and Head of Strategic Initiatives at Aviya Innovative Law) view, who once said: “No crypto, not even bitcoin, is still mature and monetarily logical enough to behave like a fiat currency. The fact that it is used by people as a means of payment still doesn’t mean it qualifies as a currency.”

Perhaps making reference to the last financial crisis, Daianu said: “When the banking system was saved, it wasn’t crypto banks that were saved. Central banks intervened by issuing base currency, which was followed by non-conventional measures.” In his understanding of the market, and the roles played by both institutions and technologies, he is convinced that the ultimate height would be for central banks to issue digital currencies as technological trends continue.

One thing though, he made a positive remark on decentralization, recognizing that “new technologies lead to disintermediation”, and credited the feature to decentralized network benefits.

Central bank digital currencies (CBDC) are trailed by mixed sentiments for most countries, with extremes like the Bank of Korea and Bank of Italy suggesting no urgent need for the emerging digital currency class, and others like the Bank of England indicating the possibility of a future central bank with cryptocurrencies.

 

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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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