The Banking Executive Magazine - July Issue 2021

Central Bank Digital Currency CBDC CHALLENGES AND OPPORTUNITIES CBDC supports the digital economy with access to the safest form of money, a claim on a central bank. This promotes diversity in payment options, make cross-border pay- ments faster and cheaper, increase fi- nancial inclusion and facilitate fund transfers. CBDC overcomes the threat of cryp- tocurrency like bitcoin because it op- erates under the control of a country’s regulatory authority, such as a central bank. Hence, CBDCs can be more broadly accepted by the general population because they are subject to legal and government reg- ulations. CBDC benefits include: • Allowing real-time monitoring and analytics of all the finances run- ning through the central bank. • Enhancing the efficiency of central banking systems. • Enabling faster and easier transac- tions. • Reducing costs of financial serv- ices by eliminating physical cash distribution and destruction from circulation. • fostering financial inclusion, those who are unbanked can get easier and safer access to money on their phone. • Improving transparency standards and limit illicit activity. • Ensuring quicker flow of monetary policy. • Reducing the dependency on for- eign currency like US dollars. CBDC risks include: • Run on banks: Citizens could pull too much money out of banks at once and purchase CBDCs, trigger- ing a run on banks. • Cybersecurity risks: centralizing through the government a system designed to be private may pro- duce a backlash among users and create cybersecurity risks. • Lack of supporting regulation: countries regulatory processes are not always updated to deal with new forms of digital money. • Difficulty in tracking cross border trade: United States is able to mon- itor and regulate most digital pay- ment flows in dollars all over the world. But new payment systems could limit the ability of policy- makers to track cross-border flows. • Widespread adoption challenges: Increased digitalization may leave a portion of society behind due to potential barriers around trust and data privacy, digital knowledge, and access to Information Technol- ogy. Central banks are interested in CBDC for many reasons: • Central banks fear losing control over the supply of money and pay- ments systems to cryptocurrencies, such as Bitcoin or even the planned Facebook-backed cryp- tocurrency Diem. • The spread of forms of payment not overseen by any central or public body could weaken central banks grip on the supply of money, and economic stability. This threat has grown even deeper as cryp- tocurrencies are increasingly em- braced. CBDC help central banks in addressing this threat. • CBDC ensures that the public has access to central bank money. • CBDC offers a new tool for central banks to transmit monetary policy and keep economies stable. CBDC AROUND THE WORLD Interest in CBDC has grown in re- sponse to changes in payments, fi- nance and technology. It was accelerated by the Covid-19 pan- demic. Pioneers in launching a CBDC initiative are the Bank of Eng- land, People’s Bank of China (PBoC), Bank of Canada, and central banks of Uruguay, Thailand, Venezuela, Sweden, and Singapore. Other na- tions are looking into the possibility of introducing a central bank-issued digital currency. Russia has been moving forward with its creation of the crypto-ruble. China aims to be- come the first major central bank to issue a CBDC. The European Central Bank is exploring the launch of a dig- ital euro. The Bank of England has stepped up research in Bitcoin and is directed to CBDC research. Trade regions like the Middle-East are uniquely positioned to take advan- tage of CBDC as energy and global trade trends shift. Kuwait, Oman, Saudi Arabia, UAE, Iran and other Middle Eastern countries have long relied on energy resources for eco- nomic growth. However, the global demand for oil may reduce over the long term as global mandates for greener energy are introduced. The central banks from both Saudi Arabia and UAE have both been collaborat- ing on blockchain and cryptocur- rency technology projects in the financial sector. Six commercial banks made up of three from each country participated in a joint CBDC project called Aber. The Saudi Cen- tral Bank and the Central Bank of UAE foresee that a dual-issued CBDC would be technically viable for cross border payments, as it would be an improvement over cur- rent centralised payment systems, like SWIFT. Aber project results show that the distributed ledger technology would enable central banks to de- velop new payment systems. The United States Digital Dollar Proj- ect is launching five pilot programs to test the potential uses of a US cen- tral bank digital currency. The online CBDCTEACKER https://cbdctracker.org/ provides a useful visual tool to track CBDC by country on the world map. The dash- board visualises research pilot, de- velopment, and launched CBDC initiatives around the world and pres- ents a tabulated listing of results. FUTURE OUTLOOK AND WAY FORWARD The advent of new technologies and the evolution of information systems ISSUE 151 JULY 2021 the BANKING EXECUTIVE 41