After the majority of central banks rejected the concept of cryptocurrencies for various reasons, from security issues to implications in the monetary system, now many of these institutes are very interested in creating their own digital currency.
Specifically, 60% of the world’s largest central banks are conducting experiments or proofs of concept to make a digital currency , according to a study by the Bank for International Settlements (BIS).
SOURCE: Alto Nivel
Although this study was published in January this year, it did not get much media attention and the most important findings of this increasingly strong commitment by central banks to digital assets are worth highlighting.
Interest in these projects grew significantly. In 2019, 42% of banks said they were already in the testing phase or experimenting, while in 2020 (the year in which the most recent survey was conducted), almost six out of ten are already testing to make their own currency not physical.
Meanwhile, 14% of central banks are moving towards development agreements and pilot programs for digital currencies. In this way, almost three quarters of the surveyed institutes have an interest in issuing a digital currency.
Not surprisingly, these general trends span large differences between jurisdictions and types of economies. Furthermore, intensifying the work of a central bank digital currency (CBDC) does not prejudice the political decision of whether or not to launch a CBDC, but it shows great interest, says the BIS in the report.
Central banks may have one or more mandates: The main one is to maintain the purchasing power of the inhabitants of their countries (this is achieved by controlling inflation) , while others are also charged with promoting economic growth. But they all have in common that they issue the bills and coins with which people, companies and institutions carry out their daily transactions.
In this BIS study, 65 central banks participated, representing 72% of the world’s population and 91% of global economic growth. 21 banks are from advanced economies and 44 from emerging economies, including Mexico.
The main motives among central banks to develop a digital currency are to improve the efficiency of payments (access to money while the use of cash falls) at the local level and improve its security . Although, if we divide the preferences between advanced and emerging economies, the interests change.
For example, for central banks in emerging economies, financial stability and efficiency of payments become more important. But above all, these developing economies see digital currencies as a means to advance financial inclusion , since many of their inhabitants do not have a bank account, but they could use digital money through a mobile device.
Regarding regulation, the outlook is still uncertain. Only a quarter of the central banks surveyed have legal authority to issue a digital currency, while 48% say there is still uncertainty in the legal framework, while 26% say they do not have the authority to launch a non-physical asset.
The majority (60%) see it possible to launch a digital currency to the public in the medium term, that is, between 1 and 6 years . This is a big jump compared to 2019, when less than 40% saw it as probable or possible to issue a coin in the same period.
Competition for cryptocurrencies?
Not necessarily. Although cryptocurrencies such as bitcoin or ethereum have had large increases in their valuations since 2020, central banks see them as a niche product, which cannot yet be massively used by the public.
Meanwhile, stablecoins are being scrutinized by most monetary authorities . According to the survey, two-thirds of central banks are studying the impact of stablecoins on monetary and financial stability.
In June 2019, Facebook presented to the public its project for a stablecoin called Libra , which would be backed by financial assets to avoid their volatility and with which payments could be made. The claims of the social network to issue its own currency caused widespread rejection among governments, financial and monetary authorities. At the moment, the project has been renamed “Diem” and it is not known if the company will launch it soon.
Although competing with the most popular cryptocurrencies is not within the objectives of the monetary authorities, there may be an interest in counteracting their influence on transactions and preventing them, one day, from substituting fiat money and undermining the authority of the monetary authorities. monetary institutions.
New entrants and private cryptocurrencies carry the risk of substituting fiat currency for privately issued cryptocurrencies for certain transactions. In turn, according to the European Central Bank (ECB), this potentially weakens the role of central banks in the economy , their ability to manage monetary policy and the possible prevention of financial crime, “says the payment systems firm. Swift in a studio.
Although the concerns that cryptocurrencies will replace money as a form of payment are not among the motivations of central banks, the need to create digital currencies that coexist with the notes and coins of the financial system is already a reality. It only remains to know which will be the first central bank to launch its asset.