US President Joe Biden recently signed an executive order to develop central bank digital money, a digital dollar. Various government agencies and the US central bank will map out how this currency will be traded. But what is digital central bank money? What does this mean for the financial system and payment method?
Central bank digital money is a new form of money issued by a central bank, such as coins and banknotes. It is a central monetary system, where the central bank keeps track of all transactions and thus has complete control. This is fundamentally different from our current money system, where many commercial banks perform these functions together.
According to the International Monetary Fund, more than 100 countries are already researching or implementing digital central bank money. China is already experimenting with its own digital yuan, while India plans to launch a digital currency in the near future. The Eurozone and Russia are also working on a digital currency. Remarkably, the US lags behind other major economies in this new development. This is why the US government is now putting more pressure on the development of the digital dollar.
Central banks are increasingly talking positively about central bank digital currencies (Source: Bank for International Settlements)
Why digital central bank money?
Payment systems have changed dramatically over the past ten years. The use of cash is declining, while the share of big tech companies like Google and Apple in daily payments is increasing. Cryptocurrencies are also growing in popularity as an alternative electronic payment method. As a result of these changes, central banks have less and less control over the payment system and the monetary system.
They are trying to regain their power with digital central bank money. It’s an alternative to cash, geared for the digital age. From now on, consumers can deposit their money directly into the central bank, thus they are less dependent on commercial banks. In this case, the deposit guarantee system is no longer needed. This sounds like an improvement, but is it a good development?
A feature of digital central bank money is that all transactions and assets are kept at a central point. This also means that the central banks will have more insight into the payment system and therefore will have to take on more of the responsibilities that now fall on the shoulders of the commercial banks. For example, think of know your customer Know your customer policy aimed at combating money laundering and crime. With digital central bank money, central banks can decide who has access and who doesn’t. This is not possible with crypto or cash payments.
Thus, central bank digital money appears to be a solution in the search for a problem. It competes with the existing infrastructure of commercial banks and, due to its central character, allows for greater financial repression. Or is financial stability beneficial? this is the question.
This article originally appeared on De Andere Krant
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