During the recently held BIS (Bank for International Settlements) Innovation Hub seminar, People’s Bank of China (PBOC) Director-General Mu Changchun laid out new proposals for CBDCs.
“Interoperability should be enabled between CBDC (central bank digital currency) systems of different jurisdictions and exchange,” Mu considered. The PBOC had shared its set of proposals with other central banks and monetary authorities, the official announced.
Central bank digital currencies (CBDCs) have been at the forefront of innovating a central bank’s functions. A CBDC works much like how cryptocurrencies work. They are digital payment instruments, except they are denominated in the national unit of account, say, like a digital dollar or a digital pound sterling a digital Euro.
CBDCs should be differentiated from private stablecoins like USDC, Tether’s USDT, or Facebook’s forthcoming Diem stablecoin. These are pegged on private ledgers owned by companies. CBDCs, on the other hand, are public digital or digitized fiat currencies controlled by central banks, which are officiated by sovereign states.
While Bitcoin and other cryptocurrencies are decentralized in nature and are algorithmically controlled, they were also developed by the private sector. As such, they are beholden to the companies and users they serve. CBDCs, on the other hand, employ the same distributed ledger technologies like blockchain, which cryptocurrencies use, and implement these protocols through centralized mechanisms.
According to Mu, critical infrastructural issues such as monitoring and information sharing must be prioritized in terms of development if central banks aim to modernize their financial systems and keep up with the supposed competitive threat of cryptocurrencies and hasten domestic and international payment channels.
“Information flow and fund flows should be synchronized so as to facilitate regulators to monitor the transactions for compliance,” Mu stated. “We also propose a scalable and overseen foreign exchange platform supported by DLT (distributed ledger technology, e.g., blockchain) or other technologies,” he added.
Being one of the most advanced central banks in terms of research and current development, the PBOC is positioning itself to become the first major central bank to issue a CBDC, a move aligned with its recent campaign to internationalize the yuan, China’s base fiat currency, and thereby reduce the Chinese monetary system’s dependence on the dollar-dominated global banking system.
Notably, China is the first major economy that has taken a decisive turn for CBDC implementation. Its Digital Currency Electronic Payment (DC/EP) program is already piloted in several Chinese cities.
A recent survey held by the BIS revealed that out of the 60 participating central banks, 86% have already begun exploring or developing their own CBDCs.
The European Central Bank is already exploring how it can introduce the digital euro within five years in the eurozone. Nevertheless, it does not come forward without opposition. Germany’s Bundesbank has posed concerns regarding risks associated or implied by the digital euro, mainly banks.
Should a significant economy implement a CBDC to a broad audience, its acceptance in international trade and payment systems would likely undermine the U.S. dollar’s status as the default currency for world trade and thereby curb U.S. influence in world affairs.
According to U.S. Federal Reserve chair Jerome Powell, the Fed must find the right approach to a digital dollar first, rather than lead other central banks and financial authorities towards digitalization. According to James Cunha, a digital dollar project is already underway, and it could be unveiled as soon as July this year, project lead at the collaboration between the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative.
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