7 central banks sketch out digital currency as China forges ahead

Look to catch up with China's 'trailblazing', Facebook's Libra

A group of seven major central banks, including the US Federal Reserve, set out on Friday how a digital currency could look like to help catch up with China's “trailblazing” and leapfrog private projects like Facebook’s Libra stablecoin.

The central banks and the Bank for International Settlements (BIS) said core features should include resilience, availability at low or no cost, appropriate standards and clear legal framework, and an appropriate role for the private sector.

Bank of England (BoE) Deputy Governor and chair of a BIS committee on payments Jon Cunliffe said the rise in cashless payments since lockdowns to fight the pandemic has accelerated how technology is changing forms of money.

Central banks began looking closely at digital currencies after Facebook last year announced its yet-to-be-launched digital token Libra that would be backed by a mixture of major currencies and government debt. The body behind Libra has since tweaked plans and now hopes to launch several “stablecoins” backed by individual currencies.

Central banks need to keep up to avoid the private sector plugging payments gaps in unsuitable ways, Cunliffe said.  Besides the Fed and the BoE, the seven central banks that have teamed up with the BIS include the European Central Bank, the Swiss National Bank and Bank of Japan, but not the People’s Bank of China.

China is already piloting a digital renminbi, with the PBOC saying it would boost the yuan's reach in a world currently dominated by the dollar. Japan’s top financial diplomat, Kenji Okamura said China was seeking to win a first-mover advantage in building its digital currency.

A bid to keep themselves relevant

A group of seven central banks coordinated by the Bank for International Settlements set out on Friday how a digital currency could function. Here is all about what it is and how it may work:

What’s a central bank digital currency (CBDC)?

A CBDC is the electronic equivalent of cash. Like a banknote or coin, it gives the holder a direct claim on the central bank, bypassing commercial banks and offering a greater level of security as a central bank can never run out of the currency it issues.

What’s the need for it?

Authorities say a CBDC will provide a basic means of payment for all at a time when cash use is dwindling. It will offer a safer and cheaper alternative to private solutions.

Their main fear is losing control of the payment system if private currencies, such as bitcoin or Facebook’s proposed Libra, are widely adopted. This may make it harder for authorities to detect money-laundering and terrorism financing but also weaken central banks’ grip on the supply of money.

How would a digital currency look?

A CBDC can take the form of a token saved on a physical device, like a mobile phone or a pre-paid card, making it easier to transfer offline and anonymously. Alternatively, it can exist in accounts managed by an intermediary like a bank, helping authorities police it and potentially remunerate it with an interest rate.

Which central banks are leading the way?

The People’s Bank of China aims to become the first to issue a digital currency in its push to internationalise the yuan and reduce its dependence on the global dollar payment system. Major state-run commercial banks are conducting large-scale internal testing of a digital wallet application, according to local media reports.

In Sweden, the Riksbank has also begun testing an e-krona. The European Central Bank and the Bank of England have both launched consultations on the matter.