Five Big Central Banks Unite to Explore Launching Their Own Digital Currencies

In the beginning, there was Satoshi. It’s been a little over a decade since the pseudonymous founder of Bitcoin introduced the blockchain-based cryptocurrency that launched a thousand more blockchain-based cryptocurrencies. Since then, not a few folks have speculated that Bitcoin would take over the world and perhaps even supplant central-bank-controlled fiat currencies.

While central banks have taken cryptocurrencies more and more seriously over the years, they also remain the ultimate authorities any rising new form of money must reckon with before knocking down the system. If anything replaces fiat currencies (in stable economies, at least), it’d likely need central bank support or even be issued by a central bank.

To that end, the Bank of England, Bank of Japan, European Central Bank, Bank of Canada, and Sveriges Riksbank (Sweden’s central bank) along with the Bank of International Settlements recently announced that they’ve banded together to research central bank digital currencies.

The new group—co-chaired by Benoît Cœuré, head of the Bank of International Settlements (BIS) Innovation Hub, and Jon Cunliffe, deputy governor of the Bank of England and chair of the Committee on Payments and Market Infrastructures at the BIS—will openly share their findings and experiences. They’ll look into emerging technologies, use cases, and digital currency design options, including how such currencies would work across national borders.

The group’s formation isn’t a commitment to launch a central bank digital currency, but the coalition shows how far the idea has come and how much weight it has with central banks. Indeed, a survey conducted by the BIS a year ago found some 70 percent of central banks [PDF] had central bank digital currency projects in the works or underway.

Why Now?

Central banks have been researching what it would take to digitize fiat currencies for years, and a few are even beginning to launch pilots. But after last year’s announcement of Facebook-backed cryptocurrency, Libra, the pressure to act increased significantly.

Bitcoin represents a small fraction of the world’s money, even combined with all the other major cryptocurrencies. It’s a fascinating, controversial, at times lurid experiment, but doesn’t yet rival fiat currencies. Libra, on the other hand, with access to Facebook’s nearly 2.5 billion monthly active users, could reach a notable fraction of the world’s population—more than any single central bank, including China’s—at launch. And it’d do so across borders.

Which is why Libra raised regulatory hackles just minutes after the plans went public.

While Libra’s future is uncertain—a number of backers have left the project and regulators continue their scrutiny—it seems to have had one significant effect: some of the biggest central banks in the world appear to be accelerating their plans for digital currencies.

Some of the benefits of central bank digital currencies may include faster, cheaper, and more secure payments, especially across borders. They might also reduce money laundering and tax evasion, offer more refined methods for managing inflation, and give central banks more direct, flexible monetary and fiscal policy tools in economic crises.

How digital fiat currencies would work in practice remains unclear. There are a number of proposed designs for central bank digital currencies which range from completely anonymous (unlikely) to totally transparent (a degree of privacy will probably be important), whether they’ll bear interest, and who has access to them (everyone or financial institutions).

The new central bank group will continue sorting through the pros and cons. Still, alongside continued research, some are closer to implementation than others.

Uruguay completed a central bank digital currency pilot in 2018 (the e-Peso), and in Sweden, where almost 80 percent of transactions are digital, the Sveriges Riksbank is creating a pilot digital currency known as the e-Krona. China too, where the majority of payments are mobile, appears to be closing in on a digital currency pilot.

Is the End of Cold Cash Upon Us?

Perhaps. But there are those who question whether that’s such a good thing. The end of hard currency could also usher in a new level of government surveillance. While such surveillance is no secret in autocratic countries (and is on the rise thanks to digital technologies), it’s increasingly controversial in democracies too, where large companies hoover up personal data with alacrity.

“Our transactions say more about us than our words. The more your daily spend is micro-tracked, the more likely you are to face an Orwellian outcome. In this sense, the fight for private payments is a moral one,” Alex Gladstein, chief strategy officer at the Human Rights Foundation and faculty at Singularity University, wrote last year.

Gladstein is under no illusions about the demise of hard currency, suggesting cash usage will sink to near zero in the next decade—which is why he says building privacy into digital alternatives will be critical. Though some privacy may be offered at the central bank level, Gladstein favors decentralized payment methods, like the Bitcoin-based Lightning network (or its competitors). Fiat money won’t disappear, but a secure, global payments system may grow alongside it, offering an alternative to paper dollars, pounds, yen, and yuan.

While last decade witnessed the birth and steep rise of cryptocurrency in public awareness, this decade may see a multitude of digital currencies grow up in parallel—public and private, centralized and decentralized, or some combination of these. The details are clearly still in the works, but increasingly, it appears the future of money is digital.