Are central banks preparing to launch digital currencies

  • Central banks warming up to digital currencies following the COVID-19 pandemic
  • China could have a digital currency in circulation by 2022
  • Canada working on legalising a digital currency
  • British pound to euro (GBP/EUR) exchange rate eyeing EUR 1.17 level

Interest in cryptocurrencies and digital currencies have accelerated amid the coronavirus pandemic, and many central banks are now debating whether central bank digital currencies (CBDCs) should become a reality.

The idea that countries will turn away from cash and adopt a digital currency is not an outlandish concept. Digital tokens also make it easier for central banks to implement negative rates – which is considered an effective method for restoring economic activity during a crisis.

Josiah Hernandez, head of the CBDC Group, a think tank specialising in sovereign digital currencies, said: “COVID-19 has accelerated the focus on digital cash to replace contaminable physical cash.” Mr Hernandez added, central banks are now exploring more reliable, effective, and optimised mechanisms for the distribution of coronavirus-related relief funds, which is fuelling aspirations to prioritise CBDCs.”

Several countries are already developing digital currencies, with China expected to have digital money circulating by 2022.

Digital currency

China could have a digital currency by 2022

China is bounds ahead of other countries in the race to develop a digital currency, having started the initiative in 2014.

The People’s Bank of China (PBC or PBOC) has already conducted large-scale trials in Shenzhen, Chengdu and Hangzhou and aims to have a new digital Chinese yuan (CNY) ready by the 2022 Winter Olympics.

It is believed that the new digital yuan or renminbi will be available to use in shops, hotels and restaurants in the Olympic Village.

According to recent reports, Sweden could follow China and be the next major nation to issue an electronic currency and is already running experimentations with the multinational global professional services company, Accenture Plc.

In fact, several countries are exploring laws and legislation to facilitate online currencies and cryptocurrencies.

The US Federal Reserve (Fed) is also toying with the idea of electronic currency. The Fed is reviewing an argument that CBDCs could usher in new monetary systems that offer greater financial inclusion.

Former Fed Chair, now-Treasury Secretary, Janet Yellen, has publicly advocated a digital US dollar (USD). Current Fed Chairman Jerome Powell has recently told Congress that the board has begun evaluating the legal framework and policy behind implementing an electronic greenback.

Bloomberg columnist Andy Mukherjee said that once China and the US issue a digital currency, it’s likely that the rest of the world will follow as “virtual money is bound to become a tool for wielding global influence – purchasing goods, assets and services internationally.”

But while most have preached the advantages of digital currency, citing lower transfer fees, fraud protection and more direct international payments, some central bank officials are concerned about the currency’s role in the larger financial ecosystem.

Governments will want to ensure they have a significant degree of control over the money circulating their economies. So it could take authorities a while to create a legal framework that facilitates online currencies.

Canada is one of several countries developing regulatory guidance to introduce a legal path for the use of electronic currency.


Canada accelerates plans for CBDC

According to the Bank of Canada (BoC), the COVID-19 pandemic has increased the urge to develop a government-back digital currency, which the board said could come sooner than previously anticipated.

While the central bank said that the issuance of a digital currency was not yet a “foregone conclusion”, cryptocurrency expert Jason Simon noted that it’s likely to become a reality given that “Canada has already created laws regarding how digital currency should be taxed.”

While the BoC has not defined cryptocurrency as legal tender, the Financial Consumer Agency of Canada (FCAC) permits the use of online currencies for purchasing goods and services on the Internet and traditional stores if they accept that payment form.

The Canada Revenue Agency (CRA) adds that, for tax purposes, they view cryptocurrency as a commodity and not a government-issued form of money.

Jason Simon also states that Canada has launched a new class of cryptocurrency to the economy in its bid to shift to digital – the stablecoin, which VersaBank is issuing.

Mr Simon said: “VCAD will be backed by Canadian dollars, making it the first digital currency issued and backed by deposits through a bank in North America.”

While the development of digital currencies is still in its infancy, don’t be surprised to find that by the end of the decade, you’ll have a multicurrency e-wallet.

According to a recent survey by the Bank for International Settlements (BIS), 86% of central banks are assessing the pros and cons of issuing a digital currency.

Meanwhile, 60% of central banks (an increase of 42% in 2019) are trialling experiments or pilot projects, and 14% of these financial institutions are pressing ahead with plans to develop electronic currency.

The Bahamas has already launched the world’s first fully-deployed digital version of a fiat currency – the Sand dollar – now being loaded on pre-paid cards rolled out by Mastercard and Island Pay.

While some sources are eyeing exponential growth in the Sand dollar following the success of Bitcoin, which has jumped to new heights in recent months, other central banks are still holding critical discussions on the benefits of adopting a digital currency.

There have also been concerns raised over global readiness and whether electronic currency genuinely supports financial inclusion when a large number of the population is not tech-savvy.

Pound Sterling continues to strengthen against the euro

Pound Sterling (GBP) is outperforming a host of major currencies on the first day of the trading week despite ongoing volatility in global markets.

The British pound to euro (GBP/EUR) exchange rate is trading 0.3% higher in midday trade at EUR 1.1563 and analysts have forecast the currency pair reclaiming the EUR 1.17 handle.

Although nerves ahead of Bank of England (BoE) Governor Andrew Bailey’s speech could trigger some weakness in GBP/EUR, the currency pair could find new support ahead of the weekend if Mr Bailey adopts a relatively hawkish stance.

Yet, while GBP/EUR has managed to maintain above the EUR 1.16 level for a second successive week, the British pound to US dollar (GBP/USD) exchange rate continues to struggle as US inflation concerns continue to trouble investors.

Although the British pound vs US dollar (GBP/USD) cross has performed better than it did during 2020, Cable has tumbled by 0.2% on Monday to USD 1.3818, and higher US bond yields continue to pose a threat.

US bond market woes reduce the appeal of riskier assets and renew demand for the safe-haven currencies, which could ensure pound Sterling (GBP) remains under pressure against the US dollar (USD) over the coming week.

Although the euro (EUR) is a risk-off currency, concerns over Eurozone’s short-term economic outlook could continue to lend GBP/EUR support in the coming week.

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