Why central banks want to launch digital currencies | CNBC Reports

Summary

Central bank digital currencies (CBDCs) are the latest buzz in the monetary world as central banks aim to maintain control in the face of surging cryptocurrencies. While traditional currencies have been like solid rocks, stable and tangible, the rise of digital and cryptocurrencies like Bitcoin threatens to change the game. Central banks are now striving to create their own digital forms of money that are backed by their credibility, hoping to provide a stable, advantageous alternative to decentralized cryptocurrencies. The transcript from CNBC delves into the potential benefits, challenges, and the innovative drive behind CBDCs' implementation worldwide.

Highlights

• Central banks are now intensely focused on introducing digital currencies. 📊
• The concept of digital money isn't new, but CBDCs bring a legal, regulated twist. ⚖️
• China's aggressive move with the e-yuan reflects its economic strategy. 🇨🇳
• CBDCs could offer cost-efficient, faster payments and financial inclusivity. 🌍
• Central banks aim to blend the reliability of cash with digital ingenuity. 💡

Key Takeaways

• Central banks are exploring digital currencies to maintain control amid the crypto surge. 💹
• CBDCs promise stability, trust, and integration with the existing financial system. 🔒
• China is leading the charge with its e-yuan, aiming to redefine global currency dynamics. 🏆
• The future of money could blend the best of cash, digital payments, and blockchain technology. 💳
• The world is on the cusp of a financial evolution with CBDCs paving the way. 🚀

Overview

In a world where digital aspires to be king, central banks are putting on their tech hats, exploring Central Bank Digital Currencies with fervor. Unlike the wild west of cryptocurrencies, CBDCs are poised to bring digital reliability, fostering a harmonious blend of traditional trust and futuristic tech. The CNBC transcript serves as a guide into this strategic pivot, aiming to preserve monetary stability amidst the rising cryptocurrency wave.

Imagine a world where transactions are seamless, inclusive, and secure, thanks to central bank-backed digital currencies. The large-scale embrace of cryptocurrencies like Bitcoin and Facebook's Diem has nudged central banks to reconsider their economic arsenal. Enter CBDCs – the official digital touch to combat private digital currencies, offering people access to secure, digital transactions, all while being just as easy to use as cash.

China's e-yuan is a frontrunner, with pilot tests already making waves. The transcript discusses how this move could potentially redefine global currency prestige and combat the overpowering influence of the dollar. CBNC's insight sheds light on how countries like China and those in the EU are poised to challenge existing payment norms, sparking a revolution that could redefine financial frameworks for years to come.

Chapters

• 00:00 - 00:30: Introduction to Central Bank Digital Currencies (CBDCs) In the 17th century, the Bank of England pioneered the use of banknotes as an alternative to coins. Today, the primary role of central banks like the Bank of England is to maintain price stability. However, a new concept is gaining traction in the banking world: Central Bank Digital Currencies (CBDCs). The interest in CBDCs has significantly increased, with nearly 90% of central banks exploring the idea.
• 00:30 - 01:00: Current State of CBDCs The chapter discusses the growing interest and experimentation with Central Bank Digital Currencies (CBDCs), stating that while 40% of central banks were experimenting with CBDCs last year, the number has now increased to 60%. A key aspect explored is the distinction between CBDCs and the already popular digital payment methods such as debit/credit cards and payment apps. The chapter highlights that although digital money is a familiar concept, CBDCs represent a significant financial evolution, particularly given the increasing popularity of cryptocurrencies in recent years.
• 01:00 - 02:00: Rise of Cryptocurrencies and Central Bank Concerns The chapter discusses the rise of cryptocurrencies, particularly focusing on Bitcoin. It highlights the significant increase in Bitcoin's value following Tesla's announcement of purchasing $1.5 billion in Bitcoin in February 2021. This surge in price gives Bitcoin a theoretical market capitalization larger than Visa and MasterCard, the world's two largest payments processing companies. The chapter also contrasts cryptocurrencies with traditional money, noting that cryptocurrencies are not issued by central banks.
• 02:00 - 02:30: Benefits of CBDCs This chapter discusses the growing interest and development of Central Bank Digital Currencies (CBDCs) as a response to the rise of decentralized digital currencies, like Bitcoin, and corporate digital currencies, such as Facebook's Diem. Initially, the cryptocurrency Bitcoin gained popularity due to its limited supply, which appealed to investors. Meanwhile, central banks began considering the creation of their own digital currencies to remain relevant in a rapidly evolving financial landscape. This was in part stimulated by the challenges posed by private corporations entering the digital currency space and the potential threat they pose to traditional financial systems.
• 02:30 - 03:30: CBDCs versus Traditional Banking The chapter explores the implications of Central Bank Digital Currencies (CBDCs) as an alternative to traditional banking. It notes the unprecedented levels of money printing by central banks during the pandemic as a measure to mitigate economic decline. The chapter compares cryptocurrencies to 'digital gold,' emphasizing the concerns of central banks about the potential of independent cryptocurrencies to undermine their control over financial systems. This concern raises the possibility and rationale for central banks to issue their own digital currencies in response to the regulatory challenges and threats posed by unregulated cryptocurrencies.
• 04:00 - 05:30: Case Study: China's CBDC Development The chapter titled 'Case Study: China's CBDC Development' discusses the features and advantages of Central Bank Digital Currencies (CBDCs) over regular bank deposits and private cryptocurrencies. It highlights that while both bank deposits and private cryptocurrencies have their advantages, CBDCs are legally recognized and backed by central banks, providing a more secure and stable financial solution. The text emphasizes the potential risk in commercial banks where part of one's savings can be lost if the bank fails, contrasting this with the stability offered by CBDCs backed by central banks.
• 05:30 - 07:00: Challenges and Geopolitical Implications of CBDCs This chapter explores the challenges and geopolitical implications of Central Bank Digital Currencies (CBDCs). It highlights how CBDCs could potentially be as trusted as cash and as convenient as a payment app, leveraging blockchain technology similar to cryptocurrencies. By distribution through commercial banks, CBDCs could minimize disruption to the financial system, preserving current operational dynamics without the central bank handling individual citizens and businesses directly. The chapter draws parallels between traditional bank notes, the closest current equivalent to CBDCs, noting that unlike physical currency, CBDCs would operate digitally.
• 07:00 - 09:00: Potential Risks and Future of CBDCs The chapter discusses the potential risks and future of Central Bank Digital Currencies (CBDCs). It describes the current system where central banks sell banknotes to commercial banks, which then distribute them to clients via ATMs. The introduction of CBDCs could provide universal access to digital currency, offering benefits such as faster and cheaper payments. In the U.S., retail payment costs are currently between 0.5% and 0.9% of GDP, and CBDCs could potentially reduce these costs.

Why central banks want to launch digital currencies | CNBC Reports Transcription

• 00:00 - 00:30 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. Three centuries later, it’s primarily tasked with maintaining price stability, much like any other central bank across the world. But these cautious institutions are now buzzing with talk of a revolutionary concept, a form of money you cannot see: central bank digital currencies. When you ask central banks around the world whether they are exploring CBDC, one year ago the answer was 80% of them were exploring, and now it's nearly 90%.
• 00:30 - 01:00 Last year, 40% were experimenting and now it's 60%. The vast majority of central banks are exploring CBDC. The idea of digital money is not new. Many of us use debit and credit cards or payments apps for transactions, but what would make a central bank digital currency different? One of the big financial developments over the last few years has been the rise in popularity of cryptocurrencies,
• 01:00 - 01:30 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. Unlike traditional money, cryptocurrencies are not issued by a central bank,
• 01:30 - 02:00 but rather via a decentralized network of computers, typically using blockchain technology. Even Facebook is trying to get in on the act with the 2019 announcement that it would develop its own digital currency, known at the time as Libra and now rebadged as Diem. And so at that point central bankers started to realize they were really under some threat. And the question became, if we can't beat them, do we join them? 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
• 02:00 - 02:30 printing more money than ever before to arrest the economic fallout from the pandemic. That's why people sometimes 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. This could cause financial instability, especially because cryptocurrencies do not have the legal or the regulatory safeguards that central bank money does. So why not issue a digital currency of their own?
• 02:30 - 03:00 Currently, regular bank deposits, cash and cryptocurrencies issued by the private sector, such as Diem and Bitcoin, all have a few features that make them useful, but the hope is that publicly available CBDCs would have all these desirable characteristics. Unlike your savings in a commercial bank, which rely on the bank’s promise to fulfill, 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.
• 03:00 - 03:30 But this wouldn’t be the case for CBDCs, which could be as trusted as cash, as convenient as a payment app, yet also benefit from the same blockchain technology which underpins cryptocurrencies. And just like cash, CBDCs could be distributed through commercial banks, avoiding too much disruption to the financial system or the central bank having to deal directly with many millions of citizens and businesses. Think of bank notes, which are the closest equivalent to central bank digital currencies that we have today. Except that they are on paper, of course. This is money that is issued by the central bank
• 03:30 - 04:00 and used daily in retail payments. The central bank sells bank notes to the commercial banks, and then the commercial banks distribute bank notes through ATMs to their clients. This means that everyone could have access to this digital currency, which could bring a lot of benefits. It could make payments faster, allowing for immediate settlements and no processing delays. And it could also make payments cheaper. In the U.S., the aggregate cost of making retail payments ranges from 0.5% to 0.9% of GDP.
• 04:00 - 04:30 Digital currencies would reduce those costs. It also means that more people could have access to electronic payments. Currently, over 1.5 billion adults across the globe don’t have access to the financial system and even in an advanced economy such as the U.S., more than 6% of Americans don't have a bank account. Issuing digital currencies could also make it easier for governments to deliver stimulus checks, or even go one step further and make targeted payments to those deemed most in need. So how soon could central bank digital currencies become a reality?
• 04:30 - 05:00 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. For China, it could also be a means of re-asserting control over a financial system challenged by the rapid growth of fintech companies Ant Pay and WeChat, these are the dominant payment technologies in China,
• 05:00 - 05:30 and they are in the hands of Alibaba and Tencent, and if Beijing can wrest that back then I think they will. And the way that it’s set up, the e-yuan, is that it will still be effectively very integrated with the commercial banks but it is effectively a direct challenge to the payment technologies, they are trying to ultimately displace them. The e-yuan's going to have its own digital wallet at the commercial bank and over time people will probably just find it more convenient
• 05:30 - 06:00 to use that, and thereby displacing Ant Pay, for example. 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. The problem is that most of the trade, the real world trade, is denominated and invoiced in U.S. dollars, right, and China sees this and it's hard for them to sort of push renminbi into the global financial system,
• 06:00 - 06:30 the global trading system, but they’re trying. But if they had a digital currency that would be potentially a really fascinating angle. So you can see, if it has got a technological advantage, that perhaps this is a way for people to think about the renminbi in a different way and perhaps, you know, ultimately start to chip away at hegemonic status of the dollar. But it's not just China. The European Central Bank has plans for a digital euro, although it may be a few years before it is available. We are going to have to address all the issues of anti-money laundering, financing of terrorism,
• 06:30 - 07:00 privacy of users and all their information, the appropriate technology that will carry that digital currency, and this is, you know, a project that could probably take us, two, three, four years before it is launched. This has got people wondering whether issuing a central bank digital currency could interfere with the effectiveness of monetary policy.
• 07:00 - 07:30 Central banks have addressed CBDCs so far, really as part of a payments discussion. That’s a discussion for monetary policy committees, for the ECB governing council, whether they want to use CBDC or not, but it’s too early to have that discussion. But theoretically if the central bank wanted, they could also pass on negative rates to the holders of central bank digital currencies? Think of CBDC as being the future of bank notes, bank notes do not bear interest. And so, if you follow that line of reasoning then CBDC should not bear interest.
• 07:30 - 08:00 And if you want CBDC to bear interest then you're creating something different. A lot depends on how much people would use CBDCs, and no central bank wants them to completely replace traditional cash, but rather to compliment it. One risk associated with CBDCs is that in an extreme situation, such as after a financial crash, you could see people withdrawing their deposits from commercial banks and opting to store their money in digital currencies backed by the central bank. Trouble would be if CBDC would replace bank deposits in a large amount
• 08:00 - 08:30 because then what happens is that savers could shift their savings from bank account to CBDC. Then banks could have a problem for funding. This might have an effect on the financing of whole economy. People can shift saving from bank account to CBDC just with a click. This would be very dangerous obviously.
• 08:30 - 09:00 As we move towards a more cashless society, will central bank digital currencies ever become as trusted and as convenient as bank notes? Quite possibly, though it may take months, maybe even years. 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. We have to buy this trust and that's why we need to stay in the economy and the way to stay in the economy is to make sure people trust us.
• 09:00 - 09:30 Thank you for watching. Would you ever use a central bank digital currency? Let us know in the comments, and don't forget to subscribe.