The stage appears to be set for a Central Bank to issue digital currency in the current year itself. The topic occupied a prominent position during a panel of discussion at Deconomy in South Korea most recently. Research director of an International banking consortium and R3, an enterprise software firm, Anthony Lewis, believes that the world will see the emergence in 2018 itself. This is despite the cryptocurrency market witnessing a depressed sentiment amidst tightening of regulations around the world.
Mandates To Fix Payment Issues
The research director thinks that a central bank issued digital currency (CBDC) is in the cards for wholesale use. His opinion was based on the discussions he had with a number of Central Banks. One of the issues that he could sense was the mandate to fix some payment problems. That would mean that the banking regulator would have to look at a solution based on Blockchain-related one. Though some of the countries like India and China were not keen on encouraging cryptocurrencies in their domestic market, they are keen on the new age technology for digital transactions.
However, if a central bank needs to issue a virtual currency, then it required legal tender status, which depended on government forming a law or regulation. However, the term “wholesale” variant of CBDC points to restricted use of the digital currency, i.e., to financial markets and markets. This would mean that such virtual currency would not be available for the general public and the retail CBDC.
However, not everyone in the panel supported the views expressed by Lewis. Their optimism was reserved for wholesale CBDCs only. For instance, CBDC head at IBM and a former CBDC researcher of a central bank in Singapore, Stanley Yong, thinks that the retail CBDC would only boost the market and credit risks. His opinion came on the back of Bank for International Settlements stating that a general purpose CBDC could increase the instability of commercial bank deposit funding. As a result, it would fuel faster bank runs.
None-the-less, Lewis emphasized the importance of security benefits due to the distributed ledger technologies. He wanted the introduction of differentiation in the structure of the financial system with the help of the technology. Lewis’ confidence came from Bank of England and People’s Bank of China exploring the possibilities of coming out with their own virtual currencies.
Make the Secondary System as Primary
In his defense for the cryptocurrency, Lewis stated, “Don’t make your secondary (decentralized) system look like your primary (centralized) system. Otherwise, if a primary system goes down in an attack, then all the attackers need to do is just to play the same trick. Then it’s not resilience; it’s just another IP address to attack.”
Irrespective of opinions, it is a fact that researchers from the financial sector are not ruling out the gains of CBDCs. For instance, online payments, which would be more secure for consumers of developed economies. In the absence, these consumers have to rely on highly leveraged banks and improved financial inclusion.