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Future of Digital Currencies: In Focus of Central Banks

Future of Digital Currencies: In Focus of Central Banks

The international conference Central Bank Digital Currencies: New Opportunities for Payments on 21 February 2020 brought together representatives of central banks from fifteen countries: Canada, Sweden, Japan, the South African Republic, Uruguay, Finland, Lithuania, Poland, Belarus, Germany, Turkey, and others. Overall, about 350 persons shared opinions on possible introduction of central bank digital currencies. Together with central bankers, representatives of international organizations, financial market (banks and fintech), researchers, Ukrainian and foreign experts joined the discussion. 

"In the year 2020, the existence of digital currency is beyond question. Digital currencies are a fact of life. The only question that remains is who will do it, and when," noted Yakiv Smolii, Governor of the National Bank of Ukraine (NBU), in the conference opening speech. 

The emergence of digital money in addition to paper money comes as a natural step in the evolution of money in the modern world. The use of cash has been declining in many countries, including Ukraine. Continuous development of technologies causes changes in the financial sector. Fintech companies offer more and more options for electronic payments based on innovative technologies. And the second wave of cryptocurrency creation by private players – which is the arrival of stablecoins – incentivizes central banks to actively research and introduce innovations.

In these circumstances, central banks have to look for ways to retain their leadership in the financial system in order to ensure that the public has access to central bank money. In so doing, central banks should take care not to interfere with the development of innovations in the financial sector. For that reason, each year central banks put more effort in researching the issue of introducing proprietary digital currencies.

Today, most central banks in developed countries work on digital currency in various ways, according to the Bank for International Settlements[1]. And half of them have already gone from research to experiments. In particular, pilot projects on issuing central bank digital currency of five countries from different continents were presented at the conference.

In Ukraine, the NBU has started looking into possibility of issuing its own digital currency, the E-hryvnia, since 2016. In 2018, a pilot project for issuing a limited volume of E-hryvnia in circulation was implemented. At the same time, the research has not only provided us with practical experience, but also posed new questions for the NBU.

We continue to look into the chance of issuing the e-hryvnia, and we will be ready to return to this matter when we are convinced that not only can it be technologically feasible, but also that it will not interfere with the pursuit of our mandate as a central bank, which is to ensure price and financial stability,” noted Yakiv Smolii, NBU Governor.

The central banks of Sweden and Uruguay as part of pilot project e-Krona and e-Peso also research central bank digital currency as an equivalent to cash for retail payments of individuals. It should be noted that the payment infrastructure of these countries is quite different, as well as the purposes the relevant central bank digital currency is meant to serve. In Sweden, the rate of noncash settlement is on the highest in the world, and digital currency is an effort of the central bank to issue proprietary digital currency considering a sharp decline in demand for cash. Regarding Uruguay, digital currency is an instrument for noncash payments that can become a cheap alternative to conventional payment instruments.

Representatives from the central banks from Canada and the South African Republic are implementing pilot projects on issuing central bank digital currency for interbank settlements called Jasper and Khokha. The central banks used these projects to test the distributed ledger technology for interbank payments, including cross-border payments.

Sharing experience in introducing digital currencies with other central banks and international financial institutions as part of the conference was of great significance for the NBU and other central banks. Participants were able to contemplate about the future of digital currencies from different angles.

In general, digital currency, according to speakers, promotes financial inclusion, makes financial services more accessible, and reduces the time and cost of payments.

On the other hand, digital currency carries potential risks. Specifically, digital currencies can revolutionize the financial system, as well as create risks to the banking system operation and the financial stability as a whole. In addition, any technologies serving as foundation for digital currencies are not immune to disruptions.

At the same time, participants discussed and contemplated on application of this innovative instrument. The participants agreed that key concern for development of innovative solutions is respective costs. Acceptability of price effects the level of financial inclusion and involvement of communities in the financial system.

The role of banks in the new ecosystem was the issue that triggered heated discussions. Will strengths and experience (long-term history of customer servicing, tight security of information and protection of values, built-in processes of financial monitoring) assist banks in securing a place in the new ecosystem? The global financial market has yet to find the answer to that question.

 Useful materials:

More information on the conference, the agenda, photos and speaker presentations of the event can be found on the designated source (the content is posted as soon as approved by the speakers).

The test of the speech by the NBU Governor is available on NBU website. 

The conference video is posted on official NBU YouTube 

 


[1] The Bank for International Settlements (BIS) survey covers 66 central banks of countries accounting for 90% of the world economy and 75% of the world population.

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