What is the digital currency that 70% of the world's central banks are studying?

hope,

It is the star behind the mountains.

–by Tycho Brahe 01

What risks are the global central banks taking?

What kind of future will you live in?

Despite the initial utopia DNA, no one would deny that the development of digital currency today is greatly influenced by government policies and official attitudes.

Behind the bear market that lasted for half a year, it was precisely the successively issued regulatory attitudes of governments.

Now the global atmosphere is undoubtedly surging with a warm current. After the cruel suppression and closed-door meditation, the world's top politicians and think tanks are more inclined to embrace the new world brought by the blockchain.

IBM, which contributed 95% of the superbook, has an official monetary and financial institutions forum, and its joint investigation report on Central Bank Digital Currency (CBDC) as a substitute for government legal currency, since last year It has been tracking the attitude of the global mainstream central bank.

Area 45 noted that only about 35% of central banks in August said they were researching and testing digital currency, and after more than two months, the ratio rose to 51%. Today, nine months later, central banks that are actively exploring CBDC have quickly exceeded 70%.

No matter how many economists slammed and how many technical observers stood by, the digital currency has already ushered in the biggest opportunity in the past 10 years: not only the collision and competition between the two forces of Silicon Valley and Wall Street, but also the central government and The trend of reconciliation of decentralized technology.

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The International Monetary Fund also released a report yesterday, together with the World Bank, collected 189 member states' views on various topics in the field of financial technology. The 96 responses received so far indicate that central banks may issue central bank digital currencies in the future.

Similar conclusions have also been confirmed in the BIS investigation report of the Bank for International Settlements.

The BIS survey has studied 63 central banks around the world, 41 of which are located in emerging market economies and 22 in developed economies, accounting for nearly 80% of the world's population and more than 90% of economic output. 70% of them have or will be engaged in CBDC theoretical research.

Even China, which has slammed the digital currency market in the past two years, was inspired by Facebook's release of Libra news. After five years, it finally officially approved the research and development of the central bank's digital currency.

“The history of the central bank began with payment services, and since then, payment-related innovation has been an integral part of the central bank. CBDC represents another potential innovation.” The World Bank is on a 34-page report. Said in the middle.

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What is the central bank digital currency?

The CBDC can be described as electronic money supported by distributed ledger technology, which will enable the central bank to issue its sovereign currency on the blockchain.

Many countries are actively exploring CBDC, including China, Iran, the Netherlands, Singapore, South Africa and Sweden.

The CBDC will be represented as a national legal currency and will be supported by an appropriate amount of currency reserves in the form of gold or foreign exchange.

The CBDC will be issued by the central bank of the official financial management institution of a country. In order to make digital currency a legal tender, some countries also need to adjust formal legislation.

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How does CBDC work?

The CBDC will be a blockchain-based digital token that runs on a licensed blockchain owned and operated by the central bank and (and possibly also) maintained by some commercial stakeholders in the national financial industry.

The transaction will be private and not publicly viewable to comply with financial secrecy laws and regulations. However, as the main owner of the blockchain, the central bank will be able to view and track every financial transaction made by the issued electronic money.

Money supply management will be controlled by the central bank, which gives unprecedented transparency to a country's financial system.

However, from the design point of view, CBDC is completely regulated by the state. The goal is not to be decentralized like most cryptocurrencies – instead they represent the fiat currency in digital form.

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Two CBDC

The two main types of central bank digital currencies currently being explored are wholesale and general purpose CBDCs.

The wholesale CBDC will be the digital currency issued by the Central Bank for central bank and banking transactions. The generic CBDC means that the electronic money issued by the central bank will be used by everyone, including financial institutions and the public.

Although both versions of CBDC are exploring, it is more likely to see wholesale CBDC first, as generic CBDC may lead to bank non-intermediation. Therefore, considering that the stability of a country's financial system is high on the agenda of the central bank, the central bank is unlikely to want to see such great damage.

This is likely to become the common path for central banks to develop digital currencies.

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What is the use of CBDC?

Financial inclusion

Financial inclusion is a means of greatly reducing global poverty. According to a research report, in 2017, one-third of adults worldwide did not have bank accounts or mobile payment facilities.

The future issuance of the CBDC Convention means adjusting the legislation and clearly defining the rules for using cryptocurrencies.

If the cryptocurrency is considered legal, this means that a person without a bank account can legally transfer funds through a cryptocurrency wallet. They can ask to pay for work in cryptocurrency.

This can increase financial inclusion and is expected to bring mankind closer to the UN's 2030 goal of ending all forms of poverty around the world.

Save cost and time

Paying someone in another country can be very expensive and time consuming. Some banks charge a fee per transaction or calculate the percentage of the total amount. In some cases, it may take several days for the payment to be settled and handed over to the payee, especially given the lack of 24/7 operability between banks.

Digital currency payments can be sent almost immediately from the sender to the recipient, at a fraction of the cost of ordinary (international) bank payments. The implementation of the CBDC will help increase the cost and time efficiency of cross-border financial transactions.

Libra’s forced and central bank’s counterattack

“The primary issue for any central banker and government is the extent to which it can replace the official system. This is because countries need to control major currencies in order to manipulate monetary policy, maintain stability and taxation. An anonymous person from the Central Bank Shanghai Branch commented on the 45th district.

This is also the reason why the banking institutions initially adopted a passive attitude toward the currency revolution of the financial services industry and adopted a wait-and-see attitude.

The Bank for International Settlements (BIS) is a Swiss institution, also known as the “Central Bank” or “Bank of Banks”, and its head recently publicly expressed its support for CBDC.

Previously, the Bank of International Settlements launched the “Innovation Center”, established in Singapore, Hong Kong and Switzerland, to promote cooperation between central banks and help them fully recognize the main opportunities.

However, it is still the news that Facebook has released Libra to really blast the central banks’ “shocks”.

District 45 learned from a Standard & Poor's analyst that monetary sovereignty is becoming a major concern for governments to force the deployment of CBDC due to the birth of Libra.

“Governments are unlikely to transfer control of monetary sovereignty to private companies. If Libra takes off as a global currency, it will have an important impact on financial and macroeconomic stability, affecting the stability of the entire financial system and macroeconomics . After all, This is why the central bank exists," he said.

He also analyzed: "The task of monetary policy is to curb by providing a stable price environment and ensuring financial stability risks, while private companies have no incentive to do so, which is why governments may restrict Libra's scope through regulation. It is possible to treat Facebook as a bank once it accepts deposits and creates credit."

Teodoro Cocca, a professor of asset and wealth management at Johannes Kepler University, said: “The second wave of financial technology is approaching, and global giants in Silicon Valley are developing alternative ecosystems, including financial services that exclude traditional banks.”

Invalidation of legal currency

So, will the general-purpose CBDC be developed? The answer is likely to be yes.

Bitcoin was born after the collapse of the US economy in 2008. The market catastrophe known as the “Great Recession” caused many people to lose their life savings, and their confidence in traditional finance was subsequently lost, triggering the entire “Occupy Wall Street” movement.

In fact, many historians in the field of cryptocurrencies have mentioned that Bitcoin creator Nakamoto does not trust central financial institutions.

Last year, Stanley Yong, IBM's CBDC solution provider that supported the blockchain, said government-backed cryptocurrencies helped mitigate the risk of a major recession.

He claims that the systemic failures that occurred in 2008 will not occur in a ledger-based economy where trading and financial trust and certainty are much higher .

"Combining the central bank's digital money transfer system and the delivery mechanisms of various commodities, derivatives and stocks in the blockchain system can avoid such a financial recession."

Some digital currencies deliberately attempt to circumvent the authority of regulators, which will still be strictly regulated, while CBDC is committed to making full use of the convenience and security of cryptocurrencies and comparing these characteristics with the tried and tested features of traditional banking systems. Combine .

In the traditional banking system, currency circulation is regulated and reserves are supported.

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What opportunities does China have?

The CBDC promises to be a cashless society.

Money is always undergoing change: in 1775 the US dollar was introduced to the United States as a currency unit. In the beginning, it did not have gold as a backing. When the "Gold Standard Method" was introduced in 1900, the situation changed. In 1971, President Nixon canceled the international exchange of dollars from gold to gold, ending the gold standard.

Today, the dollar is supported by the country’s trust in legal tender.

Era changes and technological advances are driving people to move online and mobile, resulting in a decline in cash flow. China is one of the most important and leading countries that are actively promoting electronic payments rather than cash payments.

Both Tencent and Alibaba's social/business platforms have their own mobile payment systems, which account for more than 90% of China's $18 trillion payment market.

Although these services are not proprietary currencies, and basic payments are a traditional currency, these platforms provide citizens and businessmen with large amounts of informal deposits, payments, loans, management finances, and other services that are inherently systemic.

This may mean that China will also be one of the most active and fastest-growing countries to explore CBDC.

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