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Growing Support for E-Money

By Jameson Ayers


In the years ahead, hopefully, a digital exchange between anyone in the world will be instant and effortless.

In a digital age, cash does seem a little outdated. For years, policymakers and economists discussed the possibility of digitalizing world currencies. The introduction of cryptocurrencies and the technologies that came with them, like blockchain and smart contracts, provided an interesting insight into how digital currencies might look. Of course, cryptocurrencies hardly seem to function as the fiat currencies (government-issued currencies without intrinsic value) in the world. Recent events brought the digital currency discussion back into the mainstream as a serious possibility.

Several central banks, including the Federal Reserve, or the Fed, of the United States of America (USA), the Bank of Japan, and the European Central Bank, issued a report this month, describing their interest in the implementation of digital currency to complement cash. The report offers a look at how central banks hope digital currencies will be developed and utilized in the future. Interestingly, the report exemplifies how much the different central banks agree about the fundamental features of a CBDC, or central bank digital currency.


These currencies function almost exactly like their physical counterparts and exchange for each other 1-1. Some of the most important elements of a CBDC include resilience against cyber-attacks or operational failure, acceptability, and instant settlement of transactions. Integrating something so new into the economy requires faith from individuals in the digital currency and a similar level of convenience to cash. Luckily, the internet has brought many online payment services to the mainstream, through companies like PayPal or Square, and a growing number of individuals are comfortable with online transactions. However, some regulatory concerns remain, such as protection of individuals whose online deposits are hacked. Bringing in central banks to manage the world of digital payments with a CBDC could introduce a much needed regulatory framework.

Additionally, the report highlights the potential for improved cross-border payments. One key aspect of improving cross-border payments is “interoperability”. In the context of CBDC, interoperability refers to compatibility with different payment platforms and other currencies. This potential challenge requires a great deal of collaboration between different countries, their respective central banks, and developers of the platforms themselves. Also, keep in mind the variety of regulations regarding currency. As stated in the report, altering regulations to fit one global standard is a serious challenge. This must be taken into consideration when designing an interoperable CBDC system to prevent tax avoidance or money laundering. Improved cross border payments through a CBDC allows for faster, cheaper transactions and exchanges in a globalized world.

The ongoing pandemic gives central banks another reason to encourage contactless payments, promote exchange, and of course, find new ways to strengthen the effects of monetary policy. A recent brief published by Julia Coronado and Simon M. Potter of the Peterson Institute of International Economics argues for a Fed backed CBDC in the USA. They propose the use of “digital payment providers”. This group of regulated financial institutions facilitates the exchange of digital currency among individuals at retail level. They serve as an intermediary between the Fed and the retail world. Individuals and firms interact with the Fed through both traditional banks making loans and digital payment providers, who manage smaller retail transactions.


Their main goals, like most central banks, are to protect customers in the transition and to maintain the stability of the dollar after the transition. They hope to prevent massive outflows from the banking sector in favor of the new CBDC through several conditions, like caps on the amount of money held in digital payment accounts, limiting the amount of interest paid on digital payment account balances held in reserve at the Fed, and ensuring the amount of digital currency in circulation is less than that held in traditional banking deposits.


This is just one proposed structure and implementation method for a CBDC in the USA. Other structures involve anything from retail interacting directly with the central bank, to a completely decentralized system, where individuals exchange without a third-party intermediary. The question of access and exchange of CBDCs remains up in the air.


Around the world, numerous central banks introduced live experiments to observe the effects of digital currency and to try to answer a plethora of open questions. Uruguay completed a primitive CBDC pilot program back in 2018. The pilot, which lasted six months, helps Uruguay’s central bank better understand how to best roll out digital currency and its potential effects. The 10,000 participants only needed a mobile phone. An app on the phone served as a “digital wallet” and transactions were made using the mobile phone lines, making offline transactions possible. Each account maxed out at 30,000 “e-pesos”, or about 1,000 Euros. For reference, the gross national income in purchasing power parity was 21,120 pesos in 2019. This number represents what can be considered an “average” income in terms of an international currency so it can be compared to that of other countries. The program mostly facilitated person to person (P2P) exchange, and no technical incident arose.


Overall, the program doesn’t offer many answers, if any at all, into how a digital currency might affect monetary policy or consumer behavior. However, it is good to note that individuals adapted to the program, and the technology development seems to be on the right track. The program does relate to many of the key elements discussed in the more recent multi-central bank report. Knowing that the CBDC was mostly used for P2P gives an idea of how the currency is made use of. Also, the use of mobile phone lines as opposed to “online” transactions is necessary, since internet connection problems could obstruct efficient exchange. This small scale experiment offers central banks around the world a foundation on which to base their future experiments.


Research and program development are underway around the world. Sweden, China, and South Africa all have pilot programs in the works. Studies are underway in almost every country in the developed world, from the USA to Brazil, to the Philippines, and Ghana. With Fintech exploding around the world, central banks now begin the effort to catch up and digitalize their operations.


Keep an eye out for any developments from central banks to take advantage of their pilot programs. Domestic digital currency can make any online or in-person business much more accessible to unbanked or underbanked populations. It can also be a great opportunity to see how CBDCs are favored for certain purchases or amounts exchanged by customers. More experiments, reports, and general debates are very likely over the next few years. The introduction of CBDC also seems likely within the next decade. This has massive implications for both domestic and international economies. In the years ahead, hopefully, a digital exchange between anyone in the world will be instant and effortless.


Jameson Ayers is an intern at M74 from New Jersey. He studies Economics at Fordham University in New York City. His interests include financial technology and its effects on behavioral economics.


The views expressed above are those of the author and do not reflect the official position of the M74 Group, which remains neutral on all matters. Publishers assume no liability for the content.

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