Central Bank Digital Currency and Monetary Policy
Introduction
In this paper, the aspects of central bank digital currency and monetary policy will be addressed. In particular, the paper will focus on central bank digital currencies and how transitioning to this platform will cause disruption to economies. The paper will discuss (1) the reasons governments should implement public digital currencies, (2) real-world problems that could be solved by central bank digital currency, (3) benefits of incorporating digital currencies, (4) analysis of digital currencies including Facebook’s Libra and the Cash system with the central bank digital currency, and (5) influences of monetary policy and payment system by the central bank digital currency. The paper shall base its reasoning on China’s digital currency adopted by the Central Bank in the region.
Interest in transforming central banks from traditional currencies to digital currencies has risen over the years. Digital money is not a new concept in any part of the world (Dyson and Hodgson 6). Digital money has facilitated peer-to-peer transfers of money, which, in the past, was thought to be impossible (Brunnermeier et al. 3). Digital economies are expected to disrupt how economies run from social to economic platforms. The advent of new digital economies could reshape the nature of currency competition, the architecture of international monetary systems, and the role of administration policies on digital money (Löber and Houben 4). The implications could be positive or negative based on payment systems, policy implementation, and structures as well as stability of fiscal systems.
To consider these issues, the presumption is that the central bank’s objectives around the world are to maximize the effectiveness of CBDC (central bank digital currency) in fulfilling the roles and responsibilities. The roles and responsibilities include the provision of efficiency mediums of exchange, security in FOREX (foreign exchange) currency value, and stability in economic and financial transactions in respective nations (Bordo and Levin 3). The basis is bound on the governmental policies to provide effective mediums of exchange by which administrations should bear the same rate of return as do other risk-free assets in an economy (Bordo and Levin 3).
Central Bank Digital Currency (CBDC)
There lacks a universally accepted term to define CBDC. According to Löber and Houben, the term CBDC can refer to several concepts depending on the country of origin and use (3). In England, the Central Bank refers to CBDC as electronic central bank money that can be accessed broadly than reserves (Ward and Rochemont 2). On the other hand, China dictates that digital currency should not be compared to cryptocurrency. The fact remains that digital currency has been in operation for over the years or even decades. Bordo and Levin indicate central banks already have existing digital money in the form of reserves account balances from commercial banks and other financial institutes (3). CBDC can be described as the platform that will allow greater functionality for businesses, separate operational structures from other monetary forms from the central banks, and can have interest-bearing under a pre-determined interest rate (Ward and Rochemont 3). CBDC in Sweden, for instance, has shown great promise in improving economic turnover compared to the cash-based system as shown in Figure 1. Therefore, CBDC is a more efficient system that promises to ensure the safety and security of high-value payments and retail transactions.
Figure 1: CBDC Influence to an Economy in Sweden. Source: https://miro.medium.com/max/535/1*Kq3mkQIRyOCfMyce0Rp-aw.png
Central Bank Digital Currency System
The CBDC system will have four main features. The issuer is the first feature, which is the central bank; the form is the second feature that is the digital or physical currency. Accessibility is the third and technology the fourth. The Venn-diagram below illustrates how well the system could operate in any given economy.
Figure 2: Venn diagram showing the CBDC system.
The Venn diagram is a proposition by Löber and Houben that describes the features of the CBDC (5). Central bank digital currency is at the center of the system. The system distinguishes between three forms of CBDC. There is the token-based and other account-based, which depends on the potential of the central bank digital currency system. The design features of the CBDC depend on key factors, including availability, anonymity, limits or caps, interest-bearing, and transfer mechanism (Löber and Houben 5). Limits or caps are the diverse forms of quantitative limits on the use or holdings of digital currency. There are implications of using caps or limits in any transaction, which could lead to an unprecedented flop in the system launch. For example, the inclusion of caps would limit wholesale businesses but be beneficial for other forms of businesses such as retail (Löber and Houben 5).
Anonymity, as the other form, is token-based and is designed to provide various degrees of transactions that do not require knowledge of the user’s identity. However, the degree of anonymity is dependent on the central bank policy when relating to issues such as terrorism, privacy rights, and fraud or laundering money (Löber and Houben 5). Additional factors on transfer mechanisms are critical to the digital currency system. The transfer mechanism is based on a peer-to-peer basis; the system entails the transfer of money from central deposits by a central bank, which makes it the intermediary. Transfers can only be made to other commercial banks by the central bank (Löber and Houben 5). The final factor ==s are interest-bearing and availability. Digital currency provided by the central bank needs to be provided on specific terms. In most scenarios, it is expected that central banks can only transfer money at specific operating hours, such as transactions can take between less than 24 hours and five days (Löber and Houben5). The core function of the central bank is to ensure interest rates are provided within each market cap. Therefore, the transfer of cash may require the imposition of interest rates on both token-based and account-based transfer under CBDC.
Medium of Exchange
In this section, the design elements of CBDC will be discussed. It is prudent to understand how the CBDC system operates to acknowledge the importance it brings to solving global problems as well as understanding its impact on monetary policies. Setting up a CBDC requires conventional transaction activities (Bordo and Levin 5). The activities include the issuer, transaction, user, and payment method. Regarding this, digital currency systems should possess a specific approach to carrying out transactions with the central bank being the intermediary and commercial banks being the receivers.
The first feature is the provision of tokens. According to (Bordo and Levin), tokens are ideal for the electronic transfer of money from individuals to firms, and there is the probability of minimal re-deposit to the central bank (6). The approach is similar to bitcoin. Bitcoin uses a distributed ledger technology that entails the verification of the sender and ownership of each token in addition to validating the payment transactions. In this case, nevertheless, the central banks will determine the supply of the tokens under nominal terms as legal tender (Bordo and Levin 5). Another form would be the CBDC accounts held at the central bank with specifically designated accounts for supervisory purposes on depository institutions (Bordo and Levin 4). The merit of the account-based system is the cost-benefit on reduced costs and improved transaction rates compared to the conventional cash-based system. However, there will be need to verify the account holder using identity-based documents as anti-fraud measures.
The other factor to consider is the secure store of value. Similar to interest-rate values offered at commercial banks, central banks have to strategize on the role of a secure store of value. The first option could be a constant nominal value provision (Bordo and Levin 5). Funds in the account can be held on nominal value similar to paper currency. Central banks may be required to re-adjust nominal rates to below zero as a means of ensuring that depositors move their funds instead of letting the deposits sit in the banks (Löber and Houben 5). The factor, however, needs to take into account issues of inflation. It will require the central banks to improve on inflation buffers, for instance, to lower the risk of not storing deposits for longer for the account holders (Löber and Houben 5).
The account options would be an imposition on stable real value and interest-bearing CBDC. For stable value, the real value of funds in CBDC can be preserved through the indexing on general price levels (Bordo and Levin 1). In conventional cases, general indexing was based on the gold standard, which was plagued with issues of fluctuations. The recommendation would be to introduce a general price level issued by central banks as a means to regulate the stability of the CBDC funds (Bordo and Levin 2). The other option is an interest bearing CBDC. The option would be payment of interest on CBDC by central banks. The funds held at central banks would bear the same nominal interest rates regardless of whether the accounts are held by private individuals or commercial banks (Bordo and Levin 2). The system will be similar to the current cash-based system where central banks around the world pay interest on deposits. The payment of the interest rates is presumed to increase competition among financial institutions since government issues money should bear the same return as other risk-free assets (Bordo and Levin 3). Thus, interest-bearing accounts will provide more merit to the CBDC system if central banks consider factors of inflation buffers and nominal interest rates.
Reasons Governments Should Implement Public Digital Currencies
There are numerous reasons as to why governments should implement public digital currencies. The public digital currency will improve the efficiency and safety of both retail and high-value based systems (Ward and Rochemont 3). From a retail standpoint, businesses will have the assurance of improved safety in transactions. For example, the use of peer-to-peer transactions and point of sales will no longer require cash-based transactions. In France, the digital currency known as Moneo is currently in use. The system is designed to reduce the cost of having physical cash and purchasing power to be temporarily transferred in a more efficient process (Boskov). The system provides extensive merits to the users. For customers, there is the advantage of greater transaction speed, and discounts provide for future use. Alternatively, CBDC could offer benefits for wholesales and inter-bank payments (Ward and Rochemont 3). The basis of this consideration is that it will allow for faster settlement of payments with limited settlement hours compared to the cash-based systems.
Governments should implement public digital currencies since central banks will have more control over money transfers and deposits. Account-based transactions under CBDC can provide a practically costless medium of exchange. (Bordo and Levin ) reiterate that accounts held at the central bank can be made available directly to private individuals, businesses, and commercial banks (11). The merit to such an account-based system is the general-purpose of wholesale payments. It will make it easier to make payments, clear and settle debts, and eliminate long-hour transactions(Löber and Houben 5). The limitation to this, however, is the risks and challenges in deciding which accounts to render to central banks and which ones to render to financial institutions. The limitations regard factors on clearing and settling solutions, which should be distinguished in the monetary policies for financial stability.
Furthermore, the implementation of CBDC for countries will promote improved financial transactions from a wholesale point of view. Löber and Houben indicate that wholesale activities will make efficient systems in transacting. The operational costs and use of collateral and liquidity will be made easier (8). The wholesale system is comparable to the traditional central bank reserves with bank payment systems. The wholesale system will reduce risks associated with transferring funds within the inter-bank systems making it more efficient. Correlatively, if central banks institute direct payment, it could further improve on technologies required for asset transfers, authentication, record-keeping, risk, and data management (Löber and Houben 8). Currently, there are central banks that are conducting digital currency technology programs. In these operations, the technology outlook seeks to improve legal, operational, and security requirements (Löber and Houben 8). Hence, the promise to improve the efficiency of transactions can be achieved through the implementation of public digital currencies.
From an economic perspective, digital currencies will prove more competitive compared to conventional cash-based currency systems. Ideally, the internet provides an infrastructure for digital networks both for commercial and individualized use (Brunnermeier et al. 4). The digital currencies will promote alternative platforms for increased transactions. Currently, digital systems such as Alibaba and Amazon, provide online payment using digital currencies (Brunnermeier et al. 4). Facebook, on the other hand, provides for Libra, which can be used to connect more than 3 billion people ((Brunnermeier et al. 4). As such, the possibility of making peer-to-peer transactions can be made possible such as the use of digital tokens.
Another example of the reason the administrations should implement digital currencies is on the lowered cost of transference between users. Digital currencies are unique in allowing exchange value between peers within similar networks, which eliminates the need for a third-party (Brunnermeier et al. 4). Users could be set-up on their mobile devices to execute exchanges such as M-pesa, Safaricom in Africa, and Alipay from Alibaba (Brunnermeier et al. 4). Furthermore, the use of mobile phones will reduce the need for financial expertise in conducting currency transactions. The reduction in switching costs, therefore, provides unlimited reasons as to why governments should implement digital public currencies for optimized transfer and transactions for private individuals and businesses through financial institutions.
Real-World Problems That Could Be Solved By Central Bank Digital Currency
The current Facebook’s development of Libra cryptocurrency has sparked debates on who will be able to control money in the future. Due to this, central banks, including those that are currently developing digital currency systems, have intensified the need to explore digital currency (Boskov). The platform will provide an exploration of numerous opportunities by central banks. Categorically, the opportunities will primarily reduce fraud, terrorism, and improve banking systems in developing nations.
Among the reasons for implementing CBDC is the efficiency in making payments. There is a global trend on the need to address the inefficiencies in transactions and transfer of money from one region to another. Cryptocurrencies, which are individual-based, are able to counter the ineptness in traditional cash-based systems in the transfer of money (Boskov). The proposed implementation of CBDC is portended to solve the legal-based transaction issues, which will be state-controlled. CBDC could provide the ability to make payments more efficient through the reduction of transfer and settlement times. The merit of seeking CBDC involvement is to make transfers and transactions more secure and modernized under legal boundaries. As a result, it is anticipated that CBDC could strengthen the resilience, availability, and accessibility of retail payment across the globe (Bordo and Levin 11). The CBDC is also anticipated to be helpful to developing countries and, more so, to the under-developed banking systems which do not have secure and efficient payment systems.
A profound opportunity in solving real-world problems is the security that CBDC provides. Currently, banking systems are plagued with money laundering and terrorist financing scandals (Boskov 1). CBDC is predicted to counter-terrorist or fraud and money laundering activities as CBDC is shown to bring security to the transaction activities (Boskov 2). The process, nevertheless, would mandate the cessation of money-based transactions using banknotes or at least the larger denominations. There is an issue regarding the circulation of large token amounts from central banks around the world. The probability of such terrorist and laundering transaction occurring using high-value tokens are anticipated (Boskov 2). However, this can be countered using the existing monetary policies to overcome high amount token transactions.
CBDC is anticipated to resolve the monetary policies around the world and within countries’ banking systems. Primarily, CBDC could improve the competitiveness among financial institutions, which may prompt new monetary policy instruments (Boskov 2). With such competition, challenges regarding how to control transactions, token and account holders, and terms and conditions of transactions will arise. Worse still, are the fear surrounding digital systems such as Libra and Alipay could erode the independence of monetary policies globally (Brunnermeier et al. 4). Among the solution-based strategies would be the installation of zero-based bound constraints on nominal interest rates on CBDC accounts. The presumption is that digital cash will completely replace physical cash (Boskov 2). Therefore, the result is the reduction or lowering of interest rates to promote macro-economic stability. CBDC, furthermore, could promote a wide range of monetary policies. It could include variable interest rates that could provide novel, non-redundant monetary policy instruments that allow or permit improvement of the effectiveness of the policies.
Benefits of Incorporating Digital Currencies
The approach of digital currencies has been presented with varied perspectives. On one end, scholars dictate that the benefit is extensive and can provide the government with the oversight on reducing monetary issues such as fraud (Treasury 5). To this extent, the reasons that governments should consider implementing a digital currency system are based on regulatory merits. The belief is that the government will create standards for digital currencies that address the risks posed to consumers (Treasury 5). From a regulatory approach, governments will tailor requirements that mandate specific application guidelines and protocols for currency businesses based on the specific risks they pose. Within the short term, administrations will be able to clarify existing regulations and frameworks that apply to virtual currency—for instance, e-money licenses and financial audit committees.
Furthermore, the benefits that digital currency brings are innovation. Administrations can consider the use of the tiered regulatory scheme as proposed above for long-term use (Treasury 5). The merit of using the tiered system, as described in Figure 1, is to support smaller businesses that can operate under the registration system (Raskin and Yermack 2). These businesses may be prompted to have lesser regulatory requirements compared to larger firms that pose more risks to an economy. The tiered system will ensure that businesses are more segregated, unlike the traditional cash-based system (Raskin and Yermack 2). Overall, the merit of this tiered system is that businesses above a specific threshold of risks operate on different requirements and licensees.
Additional merit to digital currencies is the provision of various data by stakeholders, which reduces costs for the administrations. Digital currencies have an added advantage of having zero-cost compared to the traditional cash-based system (Treasury 5). Also, digital currencies permit faster transactions, and larger transactions can be applied and have fixed fees compared to traditional cash-based systems (Treasury 5).
With digital currencies, the number of submissions on opportunities provides new classes or payment. As noted, digital currencies provide for lower transaction fees that make it possible, even for the retail businesses, to capitalize on the lower cost of products and or services (Treasury 2). For instance, digital currencies can promote micro-payments. As such, respondents using the digital system can also make micro-transactions, including charitable giving and salary payments (Treasury 5).
Another benefit of digital currency implementation is the reduction of cost in transporting money around economies. In comparison to the traditional cash-based system, the cost of transporting money from one region to another within an economy has always been a risky and expensive affair (Treasury 5). Digital currencies, on the other hand, observe that inter-banking payment systems such as credit or debit cards take several hours (Treasury 5). Inherently, there is a need to implement digital currencies as they make it easier to transfer within institutions from one region to another, thus, reducing the cost of transference. Furthermore, there is an added advantage to the cross-border transaction. Digital currencies provide platforms for retail, wholesale, and large conglomerate businesses the avenue to transfer monies from one country to the other (Treasury 5). The importance of this is that digital currencies can correspond to other financial institutions in other countries.
Digital currencies promote submissions through the use of cryptographic algorithms, including Blockchain, which can secure transfers. The significance is that internet transactions can be achieved and can also promote surveillance through fraud and limit forged payments (Treasury 5). The digital currencies further also promote a decentralized and distributed network of miners who can verify digital currency transactions (Raskin and Yermack 8). The benefit is the minimization of risks that single entities may be exposed to during transactions.
The concept of providing transactions to the unbanked from the banked entities can be achieved through digital currencies. An aggregated benefit of digital currencies si that they are productive in ensuring all stakeholders within an economy are integrated (Raskin and Yermack 5). As a result, competition in payments among financial institutions will augment, and incentives for more opportunities will arise. Therefore, digital currencies will promote innovation opportunities in payment technology, which may improve employment opportunities in the future (Treasury 5). Also, digital currencies will provide for improved internet protocols that are more private and secure for entities to transfer monies (Treasury 5).
Influences of Monetary Policy and Payment System by the Central Bank Digital Currency
The incorporation of the CBDC will have significant effects on the monetary policy and the payment system. The first question would be to determine which system central banks are to use. There are different terms in use when it comes to virtual money. They include digital currency, virtual currency, and cryptocurrency. Currently, electronic money is used around the world and accredited by central banks (Pieters, 20). It is a form of currency that represents a nation’s currency and can use online payment systems such as PayPal and Alipay for America and China, respectively (Pieters 20). Another form of currency is a digital currency. It is a form of electronic money, but there is no acceptable physical contact compared to electronic money. Predominantly, it has existed with the intention of purchasing digital and non-digital products and services (Pieters 20). According to Meaning et al., digital and virtual currencies can either be centralized or de-centralized (10). A centralized system would require the central banks to organize the digital currencies in one central area, whereas decentralized currencies are organized in multiple platforms (Pieters 20). The merit in using the latter is ensuring that the respondents have the opportunity to choose whichever currency they want. Therefore, it means that central banks can have their sovereign currency when transitioning to digital currencies.
Another impact of monetary policy is the decision for central banks to use cryptocurrency or not. According to Pieters, cryptocurrency is a technological currency that is used in the creation of legitimate transactions (20-21). Bitcoin is an example of cryptocurrency. Bitcoin is referred to as a decentralized virtual cryptocurrency. Bitcoin was invented to solve the problem of accounting in normal financial systems through the use of Blockchain. Central banks may be required to use Blockchain similar to what China is currently doing in its efforts to improve on CBDC as shown in Figure 3. Blockchain is an accounting system that completes transactions for any bitcoin users through the unalterable and public view. According to Raskin and Yermack, central banks may decide to use Blockchain technology for payment processing and transactions in the future (14). The merit in using Blockchain technology is the facilitation of peer-to-peer value transfers, which bypass the need for interbank processes. Therefore, central banks can offer currency monies to depositors in a more direct manner. Raskin and Yermack dictate that the implementation of Blockchain could result in a 50-80% decrease in costs for the governments (14). Blockchain, thus, can offer improved service delivery for central banks and banking systems with the improved transfer of vast amounts of money, which, based on the traditional system, often takes hours even days to transact.
Figure 3: China’s CBDC System Guide. Source: https://equalocean.com/storage/5e4801ee66c83.png
Monetary policy on reserves and co-existence with CBDC will be required. The impact of monetary policy on CBDC is determined on whether the central banks are holders as banks or non-banks (Meaning et al. 27). Another aspect, especially for the International Monetary Fund and the World Bank, is determining whether there will be a universally accessible CBDC along with the sovereign systems. The effect of this is whether the impact of having two different systems will require an identical CBDC system on the central banks or reserve banks. For instance, there is a decision to be made on whether both banking systems (central banks and IMF) will have similar electronic money currencies or non-pecuniary utility (Meaning et al. 27). It could mean that central banks can clear balances within themselves using the reserves or can be treated individually based on regulations set up internationally (Raskin and Yermack 14).
Another influence of monetary policy is on differentiated rates of interest under CBDC. The vision is for CBDC to have single interest rates regardless of the account holder (Meaning et al. 25). But, given that CBDC may offer different accounts to different entities, it may be profitable to provide different interest rates. The motivation is in the roles that financial institutions play under the monetary policy (Meaning et al. 25). Economically, there needs to be competition for profits to be earned and the central bank to charge interest rates. Paying different interest rates, for instance, will require monetary policies to influence how digital currencies will work within banking institutions (Meaning et al. 25). The downside is that banking institutions may want to hold a fraction of their balance sheets in the form of liquid assets, especially those held in central banks. Holding assets provides an opportunity cost for commercial banks in the form of liquid assets, which usually offer fewer rates of return than others. Other forms of liquidity assets include loans (Meaning et al. 25). The merit in CBDC is that banks can limit their interest income through minimization of their liquid assets but, can increase the risk through holding these liquidity assets in the future given the unpredictability of digital currencies (Meaning et al. 25).
Figure 4: Factors determining CBDC system impact on banks. Source: https://www.bankinghub.eu/innovation-digital/central-bank-digital-currency
Another influence of monetary policy is in determining how interest rates set up on CBDC will influence other non-CBDC interest rates. The worry, according to Meaning et al., is the possibility of the models implemented under CBDC to influence policy rates and other rates in the financial markets (21). The basis is on the existence of competitive money, which alternates from bank deposits to liquidity assets that attract interest rates. In a given scenario, it is predicted that people may want to relocate their portfolio to take advantage of the opportunity of higher returns with CBDC (Meaning et al. 21). Figure 5 shows how much effort central banks have placed regarding CBDC and what impact it may bring to economies around the world. As a result, it may create flow in two avenues. There may be an increase in CBDC bank deposits and not cash-based deposits. The deposits will attract wholesale rate deposits, which may have higher interest rates compared to retail-based interest rates (Meaning et al. 21).
Figure 5: Central Bank Investment in CBDC Research. Source: https://specials-images.forbesimg.com/imageserve/5e3c1ab48b6cf300071e10f4/960×0.jpg?fit=scale
Finally, the influence of monetary policy will be based on how banking institutions react. It is noted that depositing in commercial banks will improve engagement with the customer-focused relationship as CBDC will make banking less vulnerable (Meaning et al. 21). As a result, it is predicted that outflows of deposits will greatly rely on the price terms set up in the market. The impact, nevertheless, will be on how well deposits will stick to one bank. The reason is based on whether depositors will not migrate from one bank to another, sorting through the best interest rates (Meaning et al. 22). Central banks’ option to offer depositors direct accounts will also factor in the elasticity at which depositors may also venture into central banks to deposit their currencies. The disruption that central bank will cause may increase switching account moves by the public, which may impact on how banks react (Meaning et al. 22). It can be assumed that technology will make things easier for depositors. It will also make it cheaper to transact, given the predictability that it will even cost zero to transact. However, the main concern will be how monetary policy changes on implementation of CBDC, the different interest rates and account provision of central banks will affect the commercial banking systems (Meaning et al. 22). Central banks could make it easier for non-banks to offer loans, which in turn could allow non-banks to offer deposits are higher interest rates compared to the banks (Meaning et al. 22). Therefore, the bank depositing and lending system will cause unprecedented ripples that may affect the mainstream commercial banks, and how they react will be based upon the monetary policies that are required to safeguard these institutions.
Analysis of Digital Currencies Including Facebook’s Libra and the Cash System with the Central Bank Digital Currency
Decentralized systems are the go-to for electronic currencies. The disruptors have caused both panic and success in their own rights when it comes to payment systems. For instance, Facebook’s Libra is regarded as a Blockchain decentralized system that allows for peer-to-peer electronic cash systems (Taskinsoy 1). The merit of such systems is that they overcome the legal hurdles that most electronic systems have and permit appropriate approvals for transactions. The initial developer of Bitcoin generated the peer-to-peer network that allowed the transaction to occur both within countries and internationally (Dwyer 4). Bitcoin and every digital currency that exist are cryptocurrencies (Taskinsoy 1). Despite the massive applaud they have received regarding easing payment options, central banks and government are both weary and appreciative of the platform digital currencies have set up. For instance, China’s central bank study on digital currency is set to use the bitcoin platform, Blockchain, to conduct its payments. China has outwardly stated that it does not support the unregulated payment transfers offered by cryptocurrencies; thus, seeks to initiate a legal monetary policy and framework to limit any illegal transactions through the Blockchain technology.
Figure6: Difference Between CBDC and Private based cryptocurrencies such as Libra using Blockchain technology. Source: https://medium.com/the-capital/how-will-blockchain-technology-transform-the-current-monetary-system-c729dfe8a82a
CBDC and bitcoin have a similar framework in operation. The Blockchain technology that is implemented authorizes miners to solve computational problems and add new transactions. In China, it is reported that the nation prefers the use of a two-tier system, which will make it available and more accessible to the public (Dwyer 4). The two-tier system will allow China’s central bank to control bank deposits, whereas; the banks will be left to handle for their clients. The framework, according to China’s central bank, is to digitize the existing monetary system. Further, the idea is not to replace the deposits in bank accounts but to digitize them as well as the balances held in WeChat and Alipay. The difference between bitcoin and the proposed CBDC is the algorithm. With bitcoin, miners are allowed to use the algorithm and alter it when they can. With CBDC, the algorithm will be dormant to facilitate redundancy in payment systems. In bitcoin, the idea is to maintain competition among miners on the mining pools.
Additionally, bitcoin only uses wallets, whereas, CBDC is bound to have multiple accounts such as token-based or account-based depending on the entity. Wallets with bitcoin keep track of the balances and record transactions (Dwyer 4). The similarity with CBDC is the Blockchain technology with which bitcoin allows tracking of transactions and record balances within each wallet. Libra, on the other hand, has an existential payment system. According to Facebook, the system will include more than fifty payment companies, including MasterCard, PayPal, Visa, Stripe, Pago, and Mercado, among others (Taskinsoy 2). The cryptocurrency, on the other hand, is set to have different technological avenues, including eBay, Spotify, Uber, Booking Holdings, Calibra, and Farfetch (Taskinsoy 3). Libra’s regulatory concern is the massive disruption it will cause around the world, not only within countries. In the United States, the Federal Bank commission is worried about the disruption that Libra will cause in driving out the relevance of the Federal Reserve Bank (Taskinsoy 3).
Nevertheless, Libra promises to have a more stable outcome compared to bitcoin. Bitcoin’s main limitation is the lack of physical security. Also, the volatility in the use of bitcoin against currencies such as the dollar, euro, pound, and yen limit the potential to convert to actual money (Dwyer 4). China’s cryptocurrency CBDC offers a more stable ideology within the monetary system. It provides for increased safety of balances for the customers within the banking system, unlike the confusion that Libra is posing on Blockchain use similar to bitcoin’s inability to join to actual assets. Therefore, there is a lot to consider when central banks are willing to migrate to digital currencies. The volatility in Blockchain technology and the complexity in registering bank balances and transactions need to be addressed with the most caution.
Conclusion
In the frontiers, the digital currency platform is said to have numerous merits for economies around the world, especially with central banks at the helm of the transition (Löber and Houben 4). On the other hand, criticism of the impact that digital currencies will have on economies is also worrying. Countries such as China, the United States of America, and the United Kingdom are among nations that are driven towards modernization of money transactions through digital currency. It is paramount to asses both ends of the promising attributes of central banks transitioning to digital currencies and how such transitions will impact economies. The objective of this report is to succinctly discuss the central bank digital currency in the current era and how it will impact future monetary policies (Dyson and Hodgson 6). Digital money has disrupted economies globally and revolutionized how economies operate. In Africa, mobile transfers’ services predominantly dictate how digital currencies run, such as M-Pesa from Safaricom, WeChat, and Alipay’s from China (Brunnermeier et al. 3). Digital businesses such as Facebook have launched Libra- an online money transfer platform. Simultaneously, thousands of fiat cryptocurrencies maintained through Blockchain have been launched over the years (Brunnermeier et al. 3). Therefore, central banks around the world have a lot to consider when it comes to transitioning to a digital currency.
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