Comment: Libra might push central banks to speed up digital currency plans

By Staff Writer

Blockchain disruption is coming very quickly, especially to central banking. Or at least that is what we are led to believe. Global apex banks hitherto have been quite nervous, for obvious reasons, the threat they face from cryptocurrencies such as Bitcoin.

The Basel based Bank of International Settlement (BIS), which is owned by global central banks, has been quite skeptical about digital currencies in the past, even though many of the world’s lenders of last resorts are said to be looking for ways to co-opt the technology to meet their own needs. These experiments are not just restricted to central bank digital currencies, both retail and wholesale, but also for other areas such as settlements.

Besides Sweden’s Riksbank, the two global central banks that are quite serious about sovereign-backed digital currencies are in Asia – the People’s Bank of China (PBOC) and the Monetary Authority of Singapore (MAS).

The BIS has released a few reports in which it had questioned what benefits sovereign digital currencies would bring over the current electronic payment methods and it had also said it is unable to ascertain on the whole what risks such currencies would entail.

There is a slight change in tone though, with the BIS head Augustin Carstens telling the Financial Times on Sunday that the central bank digital currencies might happen sooner than expected. That raises the question of how much of Carsten’s statement has been triggered by the somewhat rapid proliferation of private digital currencies, as exemplified most prominently by Facebook’s Libra.

Just last week, BIS warned in its annual report (see here) that the entry into finance by the companies such as Facebook, Google, Amazon and Tencent could rapidly take chunks of market share away from traditional banks within a short period of time. It urged both global and local regulators to have policy discussions on areas such as data privacy, competition policy and bank regulations.

Clearly, the central banks do not want to be left behind in the blockchain race. Carsten’s comments come on the heels of a story that the BIS will be setting up innovation hubs in both Hong Kong and Singapore.

Though true believers would perhaps not call these digital currencies that work on centralized networks “blockchain,” it does bring more competition into the market. But why would consumers choose central bank digital currencies for retail use when there is already fairly convenience electronic payments system.

Most cash, especially in the developed world and even China with the widespread use of electronic payments, are already digital. Indeed, Carstens tells the FT: “There needs to be evidence of demand for central bank digital currencies and it is not clear that the demand is there yet.”

All in all, it is quite clear that the announcement by the likes of tech giants like Facebook to issue digital currencies will give further impetus to global central banks to roll out their own digital currencies.

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