Introduction:
Digital Currency is a form of currency that is available only in digital or electronic form. Many central banks around the world are researching or implementing a form of digital currency (Exhibit 1). With technology advancements and Financial Technology (FinTech) trends, central banks are looking to form a new innovative way for consumers to spend money. The Bank of Canada points out that in 2019, one-third of Canadians used cash for transactions, emphasizing more payment platforms are commonly used. This literature will look into the different central bank’s plans and implementations of how can be implemented.
Central Bank Digital Currencies (CBDC):
CBDC is “a digital form of central bank money that is different from balances in traditional reserve or settlement accounts” which translates to a digital payment instrument (central bank digital currencies, Bank for International Settlements). CBDC is an initiative being researched by Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Federal Reserve, Swiss National Bank, and Bank for International Settlements (BIS). As to why central banks would want to implement CBDC’s in the future, the main drivers for CBDC are that it ensures continued access to central bank money where cash is in decline or no longer accepted, useful as a backup payment method and easily distributed geographically, improves cross-border payments in different time zones or jurisdictions which take more time with cash conversion, and many more. For all the central banks working on the CBDC together, they have established conditions in order to fulfill the foundational principles of a currency:
do not interfere with the central bank carrying out its mandate
coexist with cash and other payment methods
enable innovation and efficiency in services for users
Bank of Canada (BOC)
The Bank of Canada is the central bank of Canada. BOC oversees the country’s monetary policy including setting over night rates and modifying the money supply. The BOC’s mandate is to promote economic and price stability in Canada. On February 10, 2021 Deputy Governor Timothy Lane discussed how the COVID-19 crisis accelerated the digitalization of currency. Lane discusses that digital currency is a need for Canadians because cash is becoming less accepted as a payment and that with the increased usage of cryptocurrency, there are flaws in current payment transactions. Offering cross-border payments is a catalyst that the digital currency will offer, specifically making it cheaper, easier, and safer to use internationally.
Benefits of Digital Currency
Digital currency introduces many benefits to the central bank and consumers. First, digital currency is a more efficient payment infrastructure relative to cash and cryptocurrency. It allows for domestic and foreign transactions and ensures no counterparty risk. Secondly, digital currency introduces a new usage of conducting monetary policy. During times of economic downturn, central banks can directly transfer money to households allowing faster and efficient results. Lastly, the implementation of digital currency in the long run eliminates costs in creating fiat money such as loonies and dollar bills.
Digital Currency Attempts:
Bahamas
Bahamas launched a digital currency in 2020 called the Sand Dollar (Sand Dollar Website). With a complex geography of 700 islands, the sand dollar gives access to financial services not given before eliminating difficult and timely costs of transporting money. In addition, the digital currency offers protection to small businesses by avoiding fees charged by credit card companies for transactions. There is only $130,000 Sand Dollars in the central bank circulation relative to $508 million total Bahamas dollars. Central Bank of Bahamas is looking into completing next steps of creating smart cards for the elderly who do not use smart phones and constructing a Know Your Client (KYC) process to create accounts. With the recent success of the Sand Dollar, nine financial institutions have integrated mobile wallet applications. Next steps that the central bank governor has announced is avoiding discrimination allowing all citizens to have access to the sand dollar and enabling interoperability from mobile payment apps to bank accounts.
Venezuela
In 2018 Venezuela launched the digital currency called the Petro to eliminate economic issues such as hyperinflation, unemployment, and income inequality. With the Petro, the Venezuelan government offered a new opportunity but instead faced a shortfall. First, the currency was structured as a cryptocurrency indicating that currency is not tracked, and counterparty risk can arise. One of the citizens indicated that they were scammed into purchasing the Petro. In addition, the Petro is backed by oil reserves but there was little drilling (oil field activity) being done in the designated areas and many of the villagers in the area were unhopeful of oil discovery. As a result, the Petro performed very poorly and is being reconstructed. Lastly, the Petro Dollar is considered to be illiquid, on a score from 1 – 100 where 100 is liquid the Petro ranks 6 (CoinMarketCap, April 2021).
Appendices:
Exhibit 1- Bloomberg “The Race to a Digital Currency”
Exhibit 2- Through the years: Percentage of Countries Engaging in CBDC
References:
Digital Bahamian Dollar Sand Dollar. (n.d.). Retrieved from https://www.sanddollar.bs
Petro Dollar. CoinMarketCap. (n.d.). Retrieved from https://coinmarketcap.com/currencies/petrodollar/
Sharma, R. (2020, September 12). Why Venezuela's Cryptocurrency, Petro, Is A Failure. Retrieved from https://www.investopedia.com/news/why-venezuelas-cryptocurrency-petro-failure/
Wilson, T. (2020, December 21). Analysis: Central bankers comb for crypto clues as Bahamas launches 'Sand Dollar'. Retrieved from https://www.reuters.com/article/us-cenbanks-digital-analysis-idUSKBN28S0KT
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