As cryptocurrencies increasingly go mainstream, pressure is growing on the world’s biggest central banks to move forward with their plans to issue digital cash and fend off private sector threats to traditional money. The biggest cryptocurrency, bitcoin, has shifted from the fringes of finance towards embrace by major investors, companies and even cities. Tesla’s $1.5 billion bet has sent bitcoin to record highs of almost $50,000 and the Facebook-backed digital currency Diem, formerly known as Libra, aims to launch this year.
Central banks from the Group of Seven nations set out in October how a digital currency could function, though progress has been slow. The communique from last week’s G7 finance ministers’ meeting did not mention the nascent technology. Here’s the latest on central bank digital currencies (CBDC).
CBDCs are the electronic equivalent of cash. Like banknotes or coins, they would give holders a direct claim on the central bank, leapfrogging commercial banks. Backed by central banks, they would be as “risk-free” as traditional money, and let holders make online payments. Access to central bank money beyond physical cash has so far been restricted to financial institutions. Extending it to the broader public would have major economic and financial repercussions.
Central banks fear losing control of the global payments system to cryptocurrencies, which are typically not controlled by any central body – or to private entities, such as in the case of Diem. That could weaken central banks’ grip on money supply, one of the main avenues for steering economies. And the threat has grown more real amid the snowballing mainstream embrace of digital currencies.
Financial firms BNY Mellon and Mastercard said last week they would offer support for digital assets, while the city of Miami is seeking to allow the use of bitcoin for paying workers, and for fee and tax payments. As the use of physical cash declines, a CBDC would be a safer digital payments alternative to cryptocurrencies.