Central bank digital currency: a world without cash

Imagine a world without paper money or coins. People would use their smartphones to spend digital currencies such as "e-dollars" or "e-yen." It's an idea that's becoming a hot issue among central bankers and policymakers around the world. The global spread of cashless payments and the announcement by IT giant Facebook that it will launch a new cross-border digital currency has ignited a debate over whether central banks should issue digital currencies instead of physical banknotes.

A survey by the International Monetary Fund suggests that central bank digital currencies could become a reality. Twenty percent of respondents said they are exploring the possibility of issuing such currencies. Their objectives varied from making financial services easier to access, giving the public a low-cost payment instrument, countering the threat of cryptocurrencies, and preventing money laundering and tax evasion.

Uruguay and Sweden are the frontrunners in the field. Uruguay was the first to announce the concept of an "e-peso". It launched a test program in 2017. Sweden has launched an "e-krona" project that aims to introduce a new currency in 2021.

The People’s Bank of China is working on it too. It is stepping up its effort this year to launch its own digital currency after five years of work. Media reports quote a bank official saying they are close to launching a digital yuan. The project seems to have gotten fresh impetus after Facebook announced its cryptocurrency plan in mid-June.

IMF Managing Director Christine Lagarde gave a speech last fall called "Winds of Change: The Case for New Digital Currency". She said she thought central banks should consider issuing digital currencies. She will be the European Bank Chief from November.

Bank of Japan

But others are more hesitant. The Bank of Japan has been exploring the technical aspects of a digital currency in collaboration with the European Central Bank. It also set up a study group on the legal front should the BOJ were to issue CBDC in response to rapid developments in technology and their possible interpretations. But BOJ Deputy Governor Masayoshi Amamiya warns that digital currencies could hurt commercial banks and their ability to provide financing, which could affect the real economy. If an "e-yen" replaces the current Japanese yen, central banks will need to develop security to keep assets and personal data safe from hackers.

The central banks may not be fully on board yet, but Agustin Carstens, the head of the Bank for International Settlements-- an institution known as the "central banks' banks"-- says they may have to, sooner than they think. Carstens was initially dismissive of CBDCs.

Central bankers and financial regulators need to once again carefully evaluate the merits and the risks of CBDCs as the world is rapidly shifting to a digitalized economy.