As certain cryptocurrency innovations are scrambling to obtain worldwide adoption, there is another race happening in a similar vein. This one pertains to several countries competing to become the first to acquire a central bank cryptocurrency.
There are six countries that are widely recognized for developing a digital currency of this kind:
While this development isn’t an original idea, as many other countries are also in the race, these six countries are reaching a milestone. They are at a point where creating a central bank cryptocurrency is plausible and could happen in the near future. The acceleration of this development could open people’s eyes to digital currency as a whole. Incidentally, it’s possible that it will pique their curiosity and encourage them to educate themselves on the subject.
Providing context: what exactly is it?
A ‘central bank’ – alternatively a ‘reserve bank’ – is a governmental financial institution that is in control of the state’s currency. Moreover, it governs the state’s money supply and interest rates. These banks are usually the regulators of the commercial banking system of their respective country. They serve as a sort of a “lender of last resort” to the banking sector. That is to say, whenever banks are unable to obtain adequate liquidity without the regulator’s assistance.
When it comes to interventions that are of the political variety, a central bank should be maximally independent. However, this is often under limited control. One can break down the primary goals of these banks into three objectives: high employment, price stability, and economic expansion. Achieving these consists of macroeconomic revisions, combating against inflation, capital investments, and activities focusing on consulting. A capital bank’s main instruments are the following:
- Complete control over interest rates
- Regulations of open market
- Capital and reserve requirements
- Managing currency exchanges
Digital currency distribution and the threat of Libra
In the past few years, there have been numerous comments and criticisms stemming from cryptocurrencies as a whole. Agustin Carstens, chief of the Bank for International Settlements (BIS), fully acknowledges this. He states that central banks will eventually issue their own digital currencies in the future.
A common interpretation of the BIS is that it functions as a central bank for central banks. Carstens says that the BIS is in support of the efforts of global central banks researching and developing digital currencies. These currencies draw their foundation from national fiat currencies. Various central banks engage in such work and Carstens says that they are working on it and supporting them. Moreover, if there is a demand from the public, the arrival of such products may be very soon.
Carsten states that:
“It might be that it is sooner than we think that there is a market and we need to be able to provide central bank digital currencies.”
These comments are generally a response to Facebook unveiling its plans for the Libra cryptocurrency. This announcement made headlines and effectively made regulators all over the world uneasy. The idea of a tech firm with billions of users launching their own currency poses a threat to state currencies.
The finance minister of France says that Libra must not become a sovereign currency. Furthermore, congresswoman Maxine Waters wants Facebook to halt development of the Libra Network until future hearings.
BIS took the liberty of name-checking Facebook in its latest annual report. They express legitimate fears that Libra and others like it pose a long-term threat to central banks’ money control:
“Regulators need to ensure a level playing field between big techs and banks, taking into account big techs’ wide customer base, access to information and broad-ranging business models.”
The creation of a central bank cryptocurrency came up in the Eleventh Development Plan. The government’s official website was responsible for its publication and on July 8, the Turkish Parliament received it. Among the subjects in the plan was – according to the translation – the implementation of “blockchain-based digital central bank money.”
Additionally, the document illustrates the government’s fostering of the legal and technical infrastructure. This will be a way to employ blockchain technology for purposes pertaining to “transport and customs.” Furthermore, the document mentions blockchain as one of several new approaches. This includes artificial intelligence and devices sharing a connection, which is otherwise known as the ‘Internet of Things’. The chief purpose of these will be to intensify public services. In the latter case, the utilization of blockchain has yet to be concrete and understandable.
Details surrounding this developing cryptocurrency is scarce, however, entertaining the idea is not necessarily new. The country’s contemplation of the idea of a national digital asset, Turkcoin, dates back to early 2018. Admittedly, this date is very recent, but even still, it’s a year-long period of the country entertaining the concept. Reports claim that the idea pitch was by Ahmet Kenan Tanrikulu. He is the deputy chair of Turkey’s Nationalist Movement Party, as well as the country’s former Industry Minister.
This news about the central bank developing a blockchain currency follows Turkey’s president, Recep Tayyip Erdogan, firing governor Murat Cetinkaya. The Financial Times states that Erdogan says that the central bank aims to provide substantial support to the economy.
The National Bank of Ukraine has been developing a pilot project testing the usefulness of a digital version of its currency. This digital currency goes by the name of e-Hryvnia. The bank is completing the pilot and plans to investigate additional uses of the token.
A key point about this specific central bank crypto development is its deviation from the other five countries. An important aspect to note is that officials do not classify e-Hryvnia as a cryptocurrency. In a rough translation of the original news report, this statement was made:
“We are not talking about cryptocurrency, we are talking about digital currency of the central bank. It can be implemented on both the centralized registry technology and the decentralized one. This is a completely separate issue, which follows from the target model chosen.”
In any case, Ukraine is actively investigating the potential of blockchain technology. They have a functioning product, yet the main obstacle is not really knowing how they will use it.
This country is the latest country to have its central bank start experimenting with its own digital currency. The Banco Central del Uruguay (BDC) says that a number of users are helping them test a mobile-based app for fund transfers.
BCD President, Mario Bergara, says that this currency will function like cash. It will allow individuals to pass balances between each other. According to a report from the Latin American Herald Tribune, he explains that:
“It’s not that you use the phone to order money transfers, as is done today, but having bills in the cellular and being able to pass them on from one user to another.”
Now, whether the digital currency will function on a blockchain platform remains unclear. Be that as it may, central banks around the world are looking to the technology during analogous trials. There’s no launch date yet, but the pilot is getting very close to its launch, according to Bergara. At this point in time, there are some technical aspects of the program that still need adjustments.
There is a notable decline in cash usage over in Sweden. In response to this, Riksbank, the central bank of Sweden, aims to promote a safe and efficient payment system. Because of this goal’s difficulty, the Riksbank is considering which role it should adopt in a continually developing digital world. This desire led to the introduction of “e-krona” to serve as a counterpart to cash.
An e-krona would provide the public with a digital form of cash, where the state would ensure the money’s value. As is, the Riksbank really only offers digital currency to banks and other RIX participants. RIX, for those unaware, is a settlement system that governs systems for settlement of obligations in financial markets. As for the other digital money, it is private bank money that commercial banks issue.
Claire Ingram Bogusz, a researcher at the Stockholm School of Economics who specializes in Bitcoin and other cryptocurrencies, says that:
“The e-krona is a real possibility. It will definitely happen sometime in the next five years.”
At this point in time, a final decision has yet to be made. Ingram Bogusz adds that the e-krona may rely on the same underlying technology used for bitcoin. In fact, the proposal mentions possibly using the blockchain. With that in mind, the Riksbank is still in the process of developing the proposal for a technical solution.
In the e-krona project, the Riksbank analyzes the general need for this cryptocurrency. The project team engages with several national and international agents in order to hear their views on an e-krona. They are also looking at proposals for suitable technology and examining the legal issues. All of this is to guarantee that the Riksbank has a clear mandate to issue an e-krona.
Not too long ago, the central bank of the Bahamas (CBOB) took a step forward regarding cryptocurrency. They made an agreement for the development of the first national digital currency and predict its completion by 2020. On May 30, the CBOB signed an official agreement with transaction provider NZIA.io. This ensures the construction and implementation of “Project Sand Dollar,” which is the first digital currency in the Bahamas.
According to the central bank, the “Project Sand Dollar” stratagem will be an:
“…integrated, affordable electronic payment system for all businesses and residents.”
This project will adhere to local financial regulations. Furthermore, it intends to provide access to digital payments for the residents of the island country. This way, it reduces both cash transactions and the costs of service delivery. It also aims to improve the operational efficiency and the overall financial inclusion in Bahamian communities.
There has yet to be an announcement regarding the islands that will pilot the project. However, bank governor, John Rolle, claims that the institution plans to adopt the project for the Family Islands by 2020.
With all this excitement surrounding the prospect of a central bank cryptocurrency, there are some reservations. Deutsche Bundesbank, the president of Germany’s central bank, warns central banks about the potential risks of introducing these particular currencies. The official claims that adopting digital money might undercut the financial system during periods of crisis. On top of that, could alter the overall business model of banks, even if they’re in a solid economic environment.
As touched upon earlier, Facebook’s Libra announcement garnered a worldwide frenzy. Not just from other banks, but also from other countries. One of them is China, whose intent behind their own central bank crypto development is a response to Libra. The reason for this is because Libra, according to the South China Morning Post, may be risky to the country’s financial system. An inquiry that Wang Xin, director of the People’s Bank of China (PBOC)’s research bureau, had was the following:
“If [Libra] is widely used for payments, cross-border payments in particular, would it be able to function like money and accordingly have a large influence on monetary policy, financial stability and the international monetary system?”
The question came up during an academic conference at Peking University’s Institute of Digital Finance. Consequently, the PBOC is now paying very close attention following Facebook’s release of a white paper. This white paper outlines plans to construct its own cryptocurrency and a financial infrastructure project that draws from blockchain technology.
It’s important to note that the PBOC is the first major central bank to study digital currencies, specifically in 2014. This is significant because it’s a step to offset the challenge from cryptocurrencies like Bitcoin. Moreover, it established a research institution in 2017 as a way to conduct further research.
Wang says that the bank’s digital currency creation is because of the uncertainty of the USD’s role following Libra’s distribution. He states that:
“If the digital currency is closely associated with the U.S. dollar, it could create a scenario under which sovereign currencies would coexist with U.S. dollar-centric digital currencies. But there would be in essence one boss, that is the U.S. dollar and the United States. If so, it would bring a series of economic, financial and even international political consequences.”
Who will come out on top?
To give a definitive answer as to which country will win this “race” would be inappropriate. Or at the very least, it would be entirely subjective where it’s not exactly suitable. The most we can do right now is keep an eye on the progress of these countries’ central banks.