Partially inspired by the concept of Bitcoin, Central Bank Digital Currency (CBDC) has been ringing in with research studies and experiments in over 85% of economies around the globe including China, Japan, US, UK, Russia, Malaysia, Sweden, etc. for a few years now. With China leading the road with its digital yuan or e-CNY, central banks around the globe are either in conflict or under the process to substitute publicly issued digital currency for the bank-issued digital money in everyday use. However, as of now, no country has officially launched its CBDC, although there are several pilot projects and research studies in progress to determine their viability and usability. The past couple of years has seen a massive surge in the digital economy, along with rising demand for online financial services. Consequently, virtual currencies or cryptocurrencies like Bitcoin and Ethereum have gained heavy traction in the private sector, resulting in thousands of cryptocurrencies serving various industries. However, price fluctuations, instability, high energy consumption, association with illegal activities, etc. have kept these currencies from being suitable for everyday use. Thus, CBDCs hope to integrate the efficiency, ease, and security of digital currencies like cryptocurrencies with the regulated and reserve-backed circulation in traditional banking systems. Easier said than done though! Even though meant to accelerate the growth and efficiency of the payment and banking systems, CBDCs come with their own set of challenges considering user privacy, current financial system & intermediaries (commercial banks, payment operators, etc.), or even their need altogether. Nevertheless, countries are approaching these concerns at their own pace. Fed Wants to “Get it right” One of the most engaged and growing markets in digital currencies, the US administration has been speculative of the growing attraction towards cryptocurrencies. Addressing the skepticism on the matter, Federal Reserve Chair Jerome Powell, during a congressional hearing on Wednesday, supported the role of US central bank digital currency in undermining the need for cryptocurrencies and stablecoins. Powell stated before the U.S. House of Representatives Financial Services Committee- “That, in particular, you wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital U.S. currency – I think that’s one of the stronger arguments in its favor.” Although Powell sees stablecoins have scope for gaining more attraction over time, he also mentions a possible launch of a report by the Federal Reserve in early September to address digital payment methods including cryptocurrencies, stablecoins, and CBDC. Putting faith in the power of public consultations regarding CBDCs and crypto assets, Powell also said: “We want to begin a major public consultation across many different groups, including Congress of course, on a CBDC. And also on stable coins and crypto.” Powell made it very clear that the Fed is more focused on doing it right and with substance instead of falling into the rat race with the rest of the economies just for the sake of coming first. Waiting for a Clearer View on CBDC: Japan In order to align with the growing pace of private innovation, the Bank of Japan launched the first phase of its CBDC experiment in April. However, Japan won’t move onto the second phase until next year. According to Hideki Murai, head of the ruling Liberal Democratic Party’s panel, remarks on digital currencies: “By around the end of next year, we’ll have a clearer view of what Japan’s CBDC would look like.” In his interview with Reuters early in July, Murai clarified that there would be no rush to make a decision on issuing a CBDC, taking time to debate details over the effect of its issuance on financial institutions and to lay out the key functions of a digital yen. Moreover, Murai extended his concerns over the design of CBDC. If focused on making commercial banks key intermediaries, CBDC would result in a shift in business along with pulling the data back to the banks. Furthermore, the Bank of Japan also needs to consider the digital yen’s compatibility with CBDCs developed by other nations to counter the aggressive growth in the issuance of China’s digital yuan. On that note, Murai expressed: “If a digital yuan becomes so convenient it’s frequently used by tourists or becomes a main settlement means for trade, the relationship between the yen and yuan could change and erode the yen’s status as a safe-haven currency” Japan has been marked in crypto history for being the first nation to mark “crypto-assets” as a legal term in law. Not to mention, the Bank of Japan falls among the group of seven major central banks that are jointly looking into core features of CBDCs. Stepping up their extensive research and coordination on digital currency to understand the prospects for issuing a CBDC, Japan’s Financial Services Agency (FSA) recently established a new unit that would supervise digital currency and decentralized finance. … Continued
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