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In the article ‘China focuses on post-Covid goals’ flow reported on how the country’s central bank is fast-tracking its own digital currency. The People’s Bank of China (PBOC), which had originally planned trials of its central bank digital currency (CBDC) in late 2020, brought forward a pilot initiative by several months to April and has announced that its CBDC will be available in time for the Winter Olympics in Beijing, which are scheduled for February 2022.
“President Xi is well aware of the strategic benefits for China in being at the forefront of digitisation,” wrote former UK national security adviser Sir Mark Lyall Grant on 25 November in The Times3 , where he suggested that the BoE should press ahead with reviewing the potential benefits of a British digital currency. “The introduction of a ‘digital yuan’, financing the infrastructure and trade opened up by the One Belt, One Road initiative, would give China the ability to bypass the world’s traditional banking system and then challenge the dollar’s pre-eminent position [as the world’s leading reserve currency].”
China is not the only country to changed tack on digital currencies. This autumn saw the first official launch of a CBDC; on 20 October The Central Bank of the Bahamas announced that the its state-backed virtual currency – dubbed the “Sand Dollar” – was being made available to the country’s 393,000 citizens after a successful pilot last year.4
As the Bank of International Settlements (BIS) has noted5 many forms of CBDC are possible “with different implications for payment systems, monetary policy transmission as well as the structure and stability of the financial system.” However, the two main variants are wholesale CBDCs and general purpose, also known as retail CBDCs. “The wholesale variant would limit access to a predefined group of users, while the general purpose one would be widely accessible.”
The BIS has also monitored the number of speeches6 given in recent years by central bank governors and other senior figures addressing the topic of digital currencies. Earlier this year it issued the chart (Figure 2) below showing how the number of speeches has risen sharply in the past four years and the attitude – initially mostly negative – is steadily becoming more positive.
This sea change was noted earlier in the year by The Economist. In its 23 July leader ‘A shift from paper to virtual cash will empower central banks’ the newspaper suggested that the primary motivation for issuing a CBDC is primarily defensive and the “gradual demise” of cash poses two risks.
- “First, online-payment systems could fail, suffering outages or hacks. To safeguard the integrity of their currencies, central banks hope to offer fail-safe digital alternatives.
- “The second risk is that private-sector systems are too successful, with more people switching to payment platforms offered by big tech firms such as Facebook or Tencent. Many central banks began taking this risk more seriously when Facebook unveiled its [Libra] plans.”
As Laboure noted in her 2 April report ‘Future Payments: Covid-19 pandemic accelerates the rise of central bank digital currencies’ and referenced by flow in ‘Covid-19’s assault on cash’, in early 2020 80% of the world’s central banks were working on a CBDC; 40% were experimenting with proofs of concept; and 10%, mostly in emerging economies, were running pilot projects.” Looking ahead, Laboure says that central banks representing about a fifth of the world’s population are likely to issue a general purpose digital currency within three years.
Figure 2: Central bank speeches on digital currency