A new report conducted by tech giant IBM and the Official Monetary and Financial Institutions Forum, a London-based forum for central banking, economic policy and public investment, analyzes findings from a survey of 23 central banks between July and September 2019. According to researchers, central banks are on track to issue retail digital currencies within the next five years as the digitization of money continues unabated and the use of cash declines.
Bankers are studying the concept of central bank digital currencies (CBDCs) because cash is on the decline in many developed countries. The report lists the substantial downside to handling cash: from complex logistics to high fees and administrative costs – especially when it comes to cross-border payments.
Central banks are also facing major competition. Tech companies are on the go, moving into the financial services space at a rapid pace. From Google to Apple to Square to Stripe to Revolut to Alibaba and Tencent, along with the threat of Facebook’s digital currency Libra, major corporations with top engineering talent and billion-sized user bases are showcasing how they can spin up new services for consumers.
Nifty apps that guarantee near-instant settlement speeds are increasingly highlighting the sluggish and slow procedures used by old school banks, displacing instruments like paper checks that require physical distribution, scanning and processing.
Says OMFIF deputy chairman Philip Middleton,
“The prospect of significant challenge to financial stability and to the dominance of national fiat currencies posed by potential currency issuance by nonbank private companies – global social media giants; telecommunications companies; technology specialists – has stimulated a great deal of new thought.”
According to the report, bankers can strive to eclipse cryptocurrencies.
“In the retail sector, efficiency gains and policy benefits may accompany the uptake of a digital version of sovereign fiat currency – one that adopts and exceeds the technical benefits of a cryptocurrency, but inherits all the underlying trust of a sovereign currency.
Facebook’s Libra has enlivened the CBDC debate.”
The researchers add,
“The principal conclusion is that we are likely to witness the introduction of a central bank – that is fiat – retail digital currency within the next five years, either as a complement to or as a substitute for notes and coins. It is improbable that the first such issuance will come from a G20 central bank; it is considerably more likely to be launched in a smaller and less complex economy in response to a specific policy objective and use case.
This may relate to improving the overall effectiveness and resilience of a national payments system by reducing the prevalence of cash. Alternatively, it could be associated with extending financial inclusion; reducing the size of the dark economy; countering financial crime; or for a specific purpose, such as transforming the cross-border transmission of migrant worker remittances.”
Says Saket Sinha, global vice president of IBM Blockchain,
“Through scores of experiments and ambitious pilot programmes, central banks and regulators around the world are becoming closely acquainted with digital currencies. Some, in both advanced and emerging economies, whose policy objectives and motivations differ markedly, will soon be in a position to launch their own retail CBDCs, as the findings of this report make clear.”
You can check out the full report here.