Central bank-backed digital currencies, such as the potential digital euro and digital yuan, may become a reality in the coming years. Unlike cryptocurrencies such as Bitcoin and Ethereum, these currencies promise less volatility and greater security. In addition, they will have the support of their respective monetary institutions, responsible for ensuring financial stability.
The European Central Bank (ECB) is studying and analyzing the creation of the digital euro, under the concept of a Central Bank Digital Currency. It would be a “digital form of central bank money that is different from balances in traditional reserve or settlement accounts” and that depends directly on the institution, according to the Bank for International Settlements (BIS), in the report ‘Central bank digital currencies: foundational principles and core features.’
The ECB is proceeding with caution and it is believed that the first studies and tests could be carried out in mid-2021. One possibility is putting into practice formulas based on blockchain technology, the same one used by cryptocurrencies such as bitcoin and ether. This would allow Europe to have tools that allow for greater transparency and monitoring of information, transactions and movements carried out, according to the BBVA Research report ‘Digital currencies issued by central banks: features, options, pros and cons.’
Unlike these two cryptocurrencies, which also have DLT (distributed ledger technology), officially backed digital currencies will be issued centrally and will be backed by their central banks. “One of the differences between a digital euro and a Bitcoin is the way they are issued. While the operations, in the case of the euro, are centralized and the only one that can issue it is the ECB, in the case of a Bitcoin it is totally different,” says Alberto Muñoz Cabanes, Professor at the epartment of Applied Economics and Statistics at the National Distance Education University (UNED).
Referring to cryptocurrency mining by users. It’s a distributed process radically different from the issuance of currency by a central bank, since states can issue it without a limit; while, for example, the monetary mass of Bitcoin is predefined and will not exceed 21,000,000. However, with cryptocurrencies something else occurs. To begin with, since they are created by the users themselves, only after the creation of the blocks and their verification do new coins enter circulation.
From there, its value is set by the market. “From an economic point of view, the native cryptocurrencies of decentralized and non-permissive networks, such as Bitcoin or Ethereum, are not anchored to the value of a legal tender, but rather are subject to the price set by supply and demand. Furthermore, it must be borne in mind that they are not backed by a legal entity that responds in the event of technical problems,” explains Natalia Español, an economist at BBVA.
a. The conversion and the value will be the same as with physical money.
b. It will be accepted and available for all types of online and offline transactions.
c. Its cost will be low and almost zero in the moments of creation.
d. It will be a safe and resilient system at all times against possible cyberattacks.
e. It will be operable between different banking systems.
f. It will be robust and legal currencies thanks to the support of a central bank.
The race for the leadership of digital currencies has already started and both Europe and China want to take the lead and prevent unregulated cryptocurrencies from being the main player in the world of digital payments. “These digital currencies respond to the interest on the part of central banks to stay updated to guarantee the fulfillment of their objectives and functions. Many central banks are investigating the impact of a CBDC issuance on the financial system, while others have opted for its issuance and are in the development phase. Such is the case of the Chinese central bank, whose digital currency DCEP is in the testing phase,” says Español.
The People’s Bank of China, the equivalent of the ECB in Europe, has been running tests of its digital currency since April with the help of four banks in the country. Given the strength that the two Asian technology giants, WeChat and Alipay have acquired in the digital payments environment, China wants to take control from now on, seeing how well these means of payment have worked in the country. Their aim is to have the digital yuan be fully operational by 2022. In the longer term, the Chinese government plans for its digital currency to replace its physical currency across the country.
At an international level, the Asian giant is looking towards a hypothetical scenario in which its digital yuan would become the world´s preferred currency. “The fact of being the first to launch your digital currency allows you to eliminate internal problems, such as ´black money,´ while increasing your fiscal efficiency, since tax payments would be immediate. It would also allow the speeding up of trade, because payments are instantaneous,” explains Muñoz, who underlines the importance that a currency of this type could have on international transactions. The convenience of this type of digital payment could act as a stimulus for rapid adoption by those involved.