New money: Central banks lay out operating manual for digital cash

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  • Retail CBDCs must be usable with domestic payment systems
  • Private sector participation needs to be closely monitored
  • Impact on Commercial Lending “May Be Manageable”
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LONDON, Sep 30 (Businesshala) – A group of central banks on Thursday outlined a possible operating manual for digital cash as they aim to strike a balance between cryptocurrencies and concerns that the new technology could overwhelm commercial lenders. .

Concerned that the explosion of bitcoin and its ilk could undermine control of their money, policymakers from Beijing to Washington are exploring central bank digital currencies, known as CBDCs.

And while a widely used digital dollar or euro may still be years away, work by central banks is increasingly taking place as consumers switch coins and notes in favor of digital payments over debit or credit cards and mobile phones. leaving fast.

Seven central banks – which include the United States, the UK and ECBs in the euro area, but not China – have said that publicly-accessed “retail” CBDCs will be combined with existing payment systems using both public and private players. needed.

Central banks working with the Bank for International Settlements said the technology should be usable with existing domestic payment systems, with a strategy to adapt to ground economic conditions.

He added that the current financial system should be given time to sync up with the introduction of CBDCs, flagging the risk of a slow bank running off if customers of a commercial bank suddenly shift savings to the new technology.

“Whether designing, developing and running a CBDC system will be a major undertaking for the central bank,” he said, adding that the participation of private operators should be closely monitored to ensure public confidence in the technology.

How central bank digital currency works

stability risk

Unlike cryptocurrencies such as bitcoin, which are typically run by private actors, a CBDC will be the equivalent of cash, issued and backed by central banks. They differ from the electronic money used in the billions of transactions per day that are funneled through most commercial banks.

The People’s Bank of China is the most advanced of the major economies on CBDCs, and is planning its biggest ever digital yuan trial at the 2022 Beijing Winter Olympics.

Meanwhile, the US Federal Reserve will “soon” release research examining the costs and benefits of CBDCs, Fed Chairman Jerome Powell said last week.

Commercial banks, worried that a retail-focused CBDC could destroy their deposit base, are trying to influence their design.

Central banks sought to reduce the risk of retail-focused CBDCs to lenders’ business models.

“Our analysis suggests that the impact on bank intermediation and lending may be manageable for the banking sector,” he said, with any impact limited in “plausible” levels of adoption.

Reporting by Tom Wilson and Mark Jones; Editing by Angus McSwan

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