In this video CNBC’s Joumanna Bercetche will talk about why central banks want to launch digital currency.
Before summarizing this video, Let’s talk about what is digital currency?
Digital currency is a type of currency that is available merely in digital or electronic form, and not in physical form. It is also called digital money, electronic money, electronic currency, or cyber cash.
The idea of digital money is not new. Many people use debit cards, credit cards and payment apps for transactions. In 1694 the Bank of England became the first public bank to regularly issue banknotes as an alternative to coins, as a means of payment. Recently central banks want to make digital currency.
One of the big financial developments over the last few years has been the rise in popularity of cryptocurrencies, with one in particular, bitcoin, standing out. Following Tesla’s announcement that it bought $1.5 billion worth of bitcoin in February 2021, the volatile cryptocurrency’s price surged to new highs, giving it a theoretical market capitalization that is even larger than the world’s two largest payments processing companies: Visa and MasterCard.
Cryptocurrencies are not issued by the banks rather these are issued by decentralized networks of computers typically using blockchain technology.
Facebook announced in 2019 that they are going to develop their own cryptocurrency namely, Diem. Since then, the central banks are under a threat. Investors in bitcoin believe that because there is a theoretical cap on the number of bitcoins that can ever be mined, the cryptocurrency will become increasingly valuable at a time when central banks have been printing more money than ever before to arrest the economic fallout from the pandemic.
That’s why people call bitcoin ‘digital gold’. Many central banks are worried that the widespread adoption of these independent cryptocurrencies could weaken their control over the financial system. Cryptocurrency does not have legal and regulatory safeguards like the bank currency so it can cause financial instability anytime.
CBDCs are recognized by law and backed by the power of the central bank, which cannot go bankrupt.
For example, if a commercial bank collapses, part of your savings could potentially be wiped out. But this wouldn’t be the case for CBDCs, which could be as trusted as cash, as convenient as a payment app. CBDCs can make payments cheaper and faster because more people will have access to electronic payments.
China is the major economy which is most advanced in its CBDC development. The People’s Bank of China has been running tests of its digital currency since April 2020 with the help of four banks in the country. Tens of thousands of consumers have already been involved with the pilot, spending two billion yuan in over four million transactions. There may also be a geopolitical consideration for China, providing a mechanism to shift away from using the U.S. dollar.
There is no doubt that Beijing views the U.S. dollar as a strategic advantage the U.S. has.
CBDCs are the future of the bank notes and bank notes do not bear interest. If banks want CBDCs to bear some interest then they will create something different. The central banks do not want CBDCs to replace bank notes they just want it to compliment the bank notes.
One risk associated with CBDCs is that in an extreme situation, such as after a financial crash, the world could see people withdrawing their deposits from commercial banks and opting to store their money in digital currencies backed by the central bank. The banks could have problem regarding funding if CBDCs replaced bank currencies in a large amount due to the fact that savers will shift their deposits from bank accounts to CBDCs.
The trust in private money is built on the trust in the currency and the fact that behind that there is a central bank which has tools to keep the value of the currency. The central bank will create the trust gradually.
0:00 – Intro
0:59 – Development of cryptocurrency
3:00 – How CBDCs works?
7:45 – Risks associated with CBDCs