Why are central banks pushing digital currencies?

Why are central banks pushing digital currencies?

Cryptocurrency
August 24, 2021 by Editor's Desk
281
Numerous alternative money forms are now moving into the currency space. With open banking, alternative means of payments, and instant payment solutions popping up, the complexity for central and commercial banks, as well as businesses and consumers, is increasing. The complexities escalate even further due to cryptocurrencies such as Bitcoin and Ethereum and stablecoins such
Central Bank Digital Currency

Numerous alternative money forms are now moving into the currency space. With open banking, alternative means of payments, and instant payment solutions popping up, the complexity for central and commercial banks, as well as businesses and consumers, is increasing. The complexities escalate even further due to cryptocurrencies such as Bitcoin and Ethereum and stablecoins such as Facebook’s Diem. 

The reliance on the stability of commercial banks becomes imperative in the financial sector with a decrease in cash usage. Commercial banks produce more than 97% of money through loans and credits to consumers and businesses, which makes the banks systemic in a societal context. 

However, commercially generated money in bank accounts, and their collective worth, will never be completely guaranteed for account holders. This can only be guaranteed with cash since it is a direct claim on a central bank. To put this into perspective, more than EUR 100,000 will be lost within the Eurozone, if a commercial bank defaults.

Why do central banks want digital currencies?

Central banks are commonly required to ensure financial stability and safe and efficient payments. However, with an increase in reliance on the private sector for payments and money production, central banks are increasing their efforts to come up with an alternative to cash and perhaps re-establish their role in the money production and payments eco-system.

Central banks are looking to create something other than just money as a means of payment – a digital version of cash that may include value-added features – or Cash 2.0. This new form of money, coined by the Bank of England in 2016, is called CBDCs, or Central Bank Digital Currencies. The Bank of England, in a 2020 discussion paper, also listed seven primary reasons why central banks are pursuing CBDCs, and diminishing cash usage was one of them.

Copenhagen Business School and Sweden’s KTH Royal Institute of Technology estimate in a research paper commissioned by The Swedish Retail and Wholesale Council, that by 2025-2027, cash will no longer be in wide use. The paper even says that cash will no longer be feasible for merchants as a means of payment by March 24, 2023.