Major International Banks are Mulling Central Bank Digital Currencies and Blockchain Technology

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This is the latest post by regular guest writer Eddie Mitchell. Eddie is a seasoned writer on all things Blockchain and crypto and we’re delighted that he has agreed to become a regular contributor to Rhetoriq.

Ten years ago on October 31st, 2008, Satoshi Nakamoto’s seminal Bitcoin paper was published and blockchain was unleashed onto the world. At the time the technology was favorable amongst anti-establishment types seeking to remove governments and financial institutions from their daily lives, a sentiment that still runs true today.

However, in what must be somewhat of a surprise to the cypherpunks of Gen 1.0 blockchain technologies, central banking institutions are examining, testing and utilizing distributed ledger technology (DLT) to issue their own centralized digital currencies or revamp their service systems.

A central bank digital currency (CBDC) is exactly as the name implies, it is a nation or regions digital form of currency, one that has been declared as legal tender by the government, which is otherwise known as fiat currency.

Institutional Attitudes

A March 2018 report published by the Bank for International Settlements (BIS) acknowledged that central banks were beginning to consider the issuance of CBDCs, and noted that recent debate was fuelled by factors such as:

“(i) interest in technological innovations for the financial sector; (ii) the emergence of new entrants into payment services and intermediation; (iii) declining use of cash in a few countries; and (iv) increasing attention to so-called private digital tokens”.

It also describes the “potential innovation” of CBDCs as being akin to innovations previously introduced into payment systems such as “immediate interbank gross settlement” and “faster retail payment systems”. That said, the report is a comprehensive study of the numerous impacts CBDCs may have on financial stability, monetary policy as well as payment systems, indicating the critical levels of investigation required prior to the issuance of a CBDC.

Bank of England

In 2016, Ben Broadbent, Deputy Governor for Monetary Policy of the Bank of England (BoE) gave a speech at the London School of Economics; describing his focus on digital currencies and the scope of possibility regarding CBDCs. With an open mind, he said:

“As far as its economic effects are concerned, my guess is that much would depend on how exactly a central bank digital currency (CBDC) is designed – and in particular the extent to which it competes with the main form of money in the economy, commercial bank deposits.”

In his conclusion, he says there is “no denying the technology is novel. Prospectively it offers an entirely new way of exchanging and holding assets, including money.” He then goes on to say that technology such as bitcoin is seen by some as a means to “bypass central banks” and others believe the underpinning technology is “an opportunity for the central bank to expand its role,”

Traditional Finance meets Blockchain

It may seem unlikely, but central banks really are pressing ahead and trialing DLT systems in varying degrees.

His comments are reflected two years later in a recent collaborative study conducted by IBM Blockchain World Wire and the Official Monetary and Financial Institutions Forum (OMFIF); it found that almost half (38%) of the 21 central banks surveyed had trailed CBDCs as a means of informing “the next upgrades” of their real-time gross settlement (RTGS) systems.

The remaining 62% were not actively pursuing the tech and furthermore, these CBDC DLT experiments have produced varying results, which according to the study is due to differing objectives between central banks as well as the exploration of “novel avenues” instead of a complete RTGS system replacement.

Proof-of-Concept

The BoE had set the standards on which most modern banks are built, and the speech made by Ben Broadbent was one of the first times that the prospective introduction of CBDCs was brought to the global stage.

Mark Carney, Governor of the BoE has been reported to have an open-minded stance toward CBDCs, however, he doesn’t believe that such a thing will be occurring in the near future despite the BoE releasing a positive working paper that signified that a CBDC is feasible with minimum risk.

The United Kingdom is somewhat of a blockchain hotspot and very recently, the BoE completed a DLT Proof-of-Concept (PoC) in a bid to revamp banking and trading systems in the UK. The project was announced in June by Carney who revealed that the BoE is intending to overhaul their RTGS system with an “ambitious build”.

CBDC in Action

Aside from the BoE, there are many cases around the globe where government-backed digital currencies have been issued in small and large-scale instances.

Tunisia was the first country in the world to issue a blockchain-based national digital currency in 2015 called the eDinar, also known as Digicash and BitDinar. In 2016 Senegal issued its own digital currency that follows the concept of a CBDC but is fully dependent on the central banking system, issuable only by an authorized financial institution.

Thailand is the latest nation to be joining the fray as of August, the Bank of Thailand has been conducting a PoC for a wholesale CBDC, which differs from a “retail CBDC” as it is only to be used financial institutions and markets; “retail CBDCs” are for general public use.

As central banks continue to unearth the mysteries of the technology behind decentralized currencies, nations such as the above and Venezuela are already utilizing the technology with moderate success. Perhaps the more developed the financial infrastructure is within a particular nation, then the harder it may be to implement a solution. A majority of nations appear to, however, be taking a back seat, and won’t be taking proactive steps any time soon.

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