Why 80% of Central Banks are Investigating Digital Currencies

The significance of digital currencies cannot be overstated, particularly within the context of central banks. According to recent reports, around 80% of central banks around the world are actively investigating the implementation of digital currencies. In this article, we will explore the motivations behind these initiatives, the benefits, and some concerns.

Stricter Control and Surveillance

The advent of Central Bank Digital Currency (CBDC) represents a significant shift in the realm of financial transactions. A CBDC is essentially a digital version of physical currency, managed through a centralized system with the central bank as the overseer. This centralized technology offers unprecedented control over the flow and supply of digital money. Essentially, during a transaction, a Big Brother—the central bank—can track and even suspend financial activities.

Centralization also brings additional power, providing central banks and governments with detailed records of financial transactions. This level of control has been described as tighter than any historical precedent, with the ability to voucher for who spent what amount, when, and to whom. This capability might make it easier to deter financial crime and illegal activities, such as money laundering and drug trafficking.

Adaptation to the Pandemic

The value of physical currency is declining due to the ongoing pandemic. Central banks are under pressure to find immediate solutions to ensure their survival. Enter CBDCs, which serve as an alternative to paper money, offering a more efficient and trackable method of managing financial transactions.

Competition and Inclusion

Competition: Central banks are concerned about the potential usurpation of their functions by private entities, especially giants like Facebook. Facebook’s Libra project, for instance, aimed to create a global payment system outside the control of traditional financial institutions. The perceived threat is existential, as it could put a critical component of the global financial infrastructure into private hands. Would trust in an economy be placed in the hands of a social media giant like Mark Zuckerberg?

Inclusion: A significant challenge for central banks is the need to ensure financial inclusion. In countries like the US, the Treasury Department encountered difficulties in delivering stimulus payments to every citizen due to the lack of access to bank accounts. By implementing a CBDC, central banks aim to create a universal payment system accessible to all, ensuring no one is left behind in the digital economy.

Conclusion

The shift towards digital currencies is driven by a combination of control, competition, and inclusion. While CBDCs offer numerous advantages, including tighter regulatory control and broader financial inclusion, they also raise important questions about privacy and the balance of power in financial transactions.

If you are interested in learning more about the subject, here are a few articles by central bankers on the topic:

“Central Bank Digital Currencies: Implications and Challenges” by the Bank of International Settlements (BIS) “Digitalization of Money – The Future of Central Banking” by the International Monetary Fund (IMF) “CBDCs: The Next Big Thing in Money?” by the Federal Reserve