Are we on the verge of digital currencies becoming mainstream?

Major nations around the globe have started talks which could lead to them adopting digital versions of their currencies. It’s a move that could bring non-traditional forms of money, such as digital and cryptocurrencies, further into the mainstream, and potentially ease some of the concerns about their reliability. But will Australia be jumping on board soon?

european central bank
Source: Yavuz Meyveci (Shutterstock)

The central banks of Canada, Japan, England, Switzerland, Sweden, and the euro zone have come together with the Bank for International Settlements (BIS) to form a group which will explore central bank digital currencies (CBDCs). Senior representatives from each bank will examine the potential merits of CBDCs and ways they could be used. 

This development comes in the wake of Facebook announcing its plans to introduce an international cryptocurrency last year, and reports that China’s central bank is gearing up to trial a fully digital yuan later this year. 

Facebook’s announcement in particular caused a significant amount of controversy, as well as concern that the emergence of private-sector digital currencies could lead to global financial instability. This in turn led to several payment firms, including PayPal, Visa, and Mastercard, reneging on their support for Facebook’s cryptocurrency. 

It’s potentially with these developments in mind that central banks around the world appear to be racing to introduce their own digital currencies sooner rather than later. This week a report from Deutsche Bank suggested that digital currencies could “become mainstream within the next two years”.

What are central bank digital currencies? 

A central bank digital currency (CBDC) is the digitalised form of a country’s ‘fiat money’, which is anything such as paper money that’s considered legal tender. CDBCs are issued and regulated by the relevant central bank, and their value is tied to that of the country’s standard currency. 

Are there any CBDCs currently in circulation? 

At the time of writing, several countries have introduced state-specific digital currencies. Some of these digital currencies, such as Tunisia’s, have been true CBDCs and benchmarked against the country’s standard currency. However other countries, including Iran, have introduced unregulated cryptocurrencies not backed by the country’s central bank, meaning they do not fit the definition of a CBDC. 

China and Uruguay have tested the issuing of digital yuan and Uruguayan pesos respectively, but have not introduced them on a national scale. 

Is Australia likely to release its own digital currency any time soon? 

It was recently revealed that Australia’s central bank, the Reserve Bank of Australia, has trialled a system in which commercial banks settle payments between each other using a CBDC. The trial examined the potential benefits of banks being able to exchange part of their RBA account balance for digital Aussie dollars, and then using the digital dollars to make and settle payments to other banks. Banks would then finally be able to convert the digital dollars again back into traditional currency. 

Beyond this trial, the RBA said it doesn’t have plans to actually introduce a CBDC any time soon, but it did note that the system offered several potential advantages, including reduced costa and faster payments. 

So while everyday Australians won’t be able to pay for their groceries with digital dollars any time soon, a digital currency is at least on the RBA’s radar. 

Why are the potential advantages and drawbacks of CBDCs? 

Accounting firm PwC suggests that CBDCs may offer a number of potential benefits to national economies, including: 

  • Lower transaction costs – businesses would hypothetically pay less to process transactions made using digital currency, which could potentially lead to lower prices for consumers.
  • Greater financial inclusion among populations – digital currencies could make digital payments more accessible for households or individuals currently without the means to make them.
  • Increased privacy – digital currency could potentially allow for greater anonymity than debit or credit cards.

However, CBDCs could come with potential downsides, according to PwC, including: 

  • Increased risk of ‘bank runs’ – widespread adoption of digital currency could lead to consumers disengaging from commercial banks and withdrawing their cash deposits en masse.
  • Geographic limitations – while physical money can be transported between countries and exchanged for other currencies, a CBDC may only function or have value within a certain geographical area.
  • Potential for technology failures – similarly to how ATM and EFTPOS networks can crash and leave consumers unable to withdraw cash or pay for things using their card, the technology supporting a CBDC could hypothetically fail and leave consumers unable to access their digital currency.

What’s the difference between CBDCs and cryptocurrency?

For a digital currency to qualify as a CBDC, it must be both issued and regulated by a country’s central bank, and its value must be tied to that of the country’s standard fiat money. CBDCs can hypothetically be used in all the same ways that physical fiat money can, as they are essentially that same fiat money in digital form. 

Cryptocurrency, however, is not regulated and issued by a central bank in this way, and is not benchmarked against any standard currency. Some nation-specific cryptocurrencies, including Iran’s ‘PayMon’, are backed by non-fiat securities such as gold, but their value may fluctuate. There is also concern that national digital currencies, crypto or otherwise, will be treated as ‘illegitimate’ if not backed and/or regulated by a country’s central bank.

Furthermore, while CBDCs are supposedly just as accessible and universal as standard currency, cryptocurrencies generally require the use of online crypto exchanges, and digital wallets, and may only be accepted by certain merchants. 

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