In a recent interview with Coinisseur, Tommaso Mancini-Griffoli, Deputy Division Chief in Monetary and Capital Markets Department at the International Monetary Fund (IMF), provides his perspective on blockchain projects ran by central banks around the world to create a new form of money – digital money – referred as central bank digital currency (CBDC).
CBDC, with its backing from national fiat currencies, aims to become a widely accessible digital form of fiat money. The goal is that it earns acceptance as legal tender. It is an effort by global central banks to take an active role in the digital money space by issuing and regulating digital monetary commodities.
The plan has already received backing from the International Monetary Fund (IMF). Speaking to Coinisseur, Mancini-Griffoli said that CBDC digital currency allows individuals to hold liability in a central bank, instead of commercial banks. The digital currency does not run on blockchain technology. However its usage would help settle payments and to store value.
What are the benefits of CBDC?
IMF says it sees potential in using central bank digital currency to reduce costs and enable financial inclusion, particularly in emerging markets and lower-income countries.
According to Mancini-Griffoli:
“Central bank digital currency may help satisfy the two goals of financial inclusion and costs of maintaining a payments system.”
Mancini-Griffoli also expressed concerns about the dominance of the payment marketplace by a few private players. He said that excessive monopoly by these players puts the payment system at risk of collapse, especially if the dominant players were to exit the market. It is, therefore, important for the central bank to step in and guide the trajectory of digital currencies to protect consumers and ensure stability.
Another benefit of the central bank digital currency is that it can facilitate the trading of blockchain-based assets. This is possible because trading of assets on the blockchain using a digital currency is cheaper and more efficient. This true when comparing it to traditional means of payment like cash and wire transfers.
What about the Risks?
Just like any other digital currency, CBDC has its share of risks. The main risk, according to Mancini-Griffoli, is that CBDC might result in the disintermediation of the banking sector. Credit provision and stability of banks are the two main areas that the IMF sees the most impact. However, the central bank can offer interest rates on CBDC to restore stability. This would be necessary in situations where large credit providers face difficulty or even bankruptcy.
Mancini-Griffoli also noted that while regulations can help solve current monetary issues such as limiting monopoly and controlling transaction prices, they have limitations. For this reason, central banks may introduce CBDC to compete directly with the private sector in the area of payments.
Is CBDC originating from a Blockchain?
No. IMF says CBDC “does not necessarily have to be designed as a blockchain enabled token”. Instead, central banks are considering issuing the currency on an accounting system that runs only one node. This implies that those wishing to issue digital coins will able to do so.
IMF suggests that CBDC could be offered through a private/public partnership. This would be known as a synthetic central bank digital currency. In this model, all the aspects of digital currency are continually moving to the private sector so that the central bank acts only as a backup system. Fiat currency must support a token issuance so that the money that a customer deposits with the stablecoin issuer arrives in a reserve account at a central bank. This will enable companies to reduce costs. In addition, it also saves them the trouble of having to conduct customer verification processes themselves.
“Central banks in very large and very small countries, advanced and emerging economies, each has its own reasons to think about launching a central bank digital currency,” Mancini-Griffoli concludes.
Currently, Uruguay, Sweden, China, and Eastern Carribean Central Bank are the notable central banks around the world. Currently they are either exploring or piloting a central bank digital currency.