Central banks including the Reserve Bank would reap substantial benefits by issuing their own digital currencies but have been warned by the International Monetary Fund (IMF) the foray into new technology could also undermine public trust in the entire financial system.
In a paper released overnight examining the future of central bank digital currencies (CBDCs), the IMF found there was growing interest in the new form of money that offered opportunities to make it easier for people and businesses to avoid banks in their financial dealings.
The e-yuan, being used at the Beijing Olympics, is a sign of the effort by central banks to create their own digital currencies.Credit:AP
But it also cautioned there were major issues around technology, the law and cybersecurity that were still being investigated and may curb enthusiasm for CBDCs.
A handful of countries have started developing or introduced CBDCs. Unlike cryptocurrencies or stablecoins, which are private and based on blockchain technology, a CBDC is a digital version of a national currency and financially backed by the country’s central bank.
The Bahamas has a CBDC called the Sand while China’s central bank is trialling the e-yuan. Athletes at the Beijing Winter Olympics are able to use the virtual currency at sporting venues across the city.
Last month, the US Federal Reserve – which had previously expressed serious reservations about the CBDC concept – issued a white paper on the possible creation of an electronic American dollar. It noted that such a development would represent a “highly significant innovation in American money”.
IMF managing director Kristalina Georgieva said if CBDCs were designed prudently, they could offer more safety, greater availability and allow for lower costs than private forms of digital money such as cryptocurrencies.
Stablecoins, which are backed by assets such as a large holding of a national currency, could also struggle to survive in the face of central bank-backed digital currencies.
But Ms Georgieva cautioned there were risks with the new technology which could undermine central banks altogether. “Introducing a CBDC is no substitute for this underlying trust built over decades – a public good that allows money to grease the wheels of our economies,” she said.
“The success of a CBDC, if and when issued, will depend on sufficient trust. And, in turn, any successful CBDC should continue to build trust in central banks.”
IMF head Kristalina Georgieva says while there may be benefits from CBDCs, central banks had to maintain trust in the financial system.Credit:Bloomberg
The IMF paper, which focuses on the efforts of several central banks and their efforts to develop a CBDC, found there are several common issues facing digital currencies including their technology base and the tension between traditional fiat money and a cyber versions.
One reason central banks are looking at digital currencies is that people would not have to go through their bank to move cash between themselves and businesses, reducing costs for financial transactions.
The fund said central banks would have to consider trade-offs when looking at digital currencies. These would include anonymity and illicit use of money, risk reduction and financial inclusion.
“There are still open questions, and CBDC remains an uncharted territory, raising challenges as well as opportunities. Increased international information-sharing of insights learned from individual CBDC projects and cooperation on policy and design issues will be important going forward,” it found.
Late last year, a Senate committee investigating the future of finance and technology in Australia recommended Treasury lead a policy review of the viability of a retail CBDC issued by the Reserve Bank.
That recommendation has been formally adopted as federal government policy.
The RBA has moved slowly in the digital currency area. In December, it completed its Project Atom research into wholesale CBDCs which found such a currency could improve efficiency and innovation across financial market transactions.
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