Will The Pandemic Finally Get Central Banks Interested In Building Digital Currencies?

The tipping point might be nigh for digital dollars and other central bank-issued currencies done through bits and bytes.

As politicians across the globe grapple with the pandemic’s continued economic fallout and the need to get stimulus funds to individuals, corporations and even local governments with speed and security, digital delivery of those dollars is likely to gain increasing traction.

As reported in this space last month, the efforts are still nascent. In the United States, the digital dollar was floated in a draft proposal of one of the early stimulus bills.

In that proposal, the digital dollar would have been “a balance expressed as a dollar value consisting of digital ledger entries that are recorded as liabilities in the accounts of any Federal Reserve bank; or an electronic unit of value, redeemable by an eligible financial institution (as determined by the Board of Governors of the Federal Reserve System).”

The effort toward digital dollars may be getting a bit of a nudge from the private sector, too. Payments giant Visa recently filed a patent application with the U.S. Patent and Trademark Office that would create a digital currency underpinned by blockchain technology.

The company wrote in the document that under the system, users could “hold digital currency with the same denomination as the local physical currency (e.g., $100 for User A in America, 200 pesos for User B in Mexico and so forth) in order to perform transactions in a secure, fast and reliable way.”

“A central entity may be a central bank which regulates a monetary supply,” the company wrote. “A central entity may implement a monetary policy and issue currency. A central entity may maintain exclusive rights to create or destroy currency in a region such as a nation. A central entity may be associated with a government of such a region.”

The Visa patent application is just one wrinkle in a global effort that has seen a number of central banks focusing on digitizing their fiat. At least some of these efforts seem aimed at stanching the rise of cryptocurrencies, which proponents say can compete with traditional currencies because of their decentralized nature.

Earlier this month, Temasek Holdings, a state-owned investment firm in Singapore, joined Facebook’s Libra project, which has been working on digital currencies.

And yet there may be a wide gulf between exploration of digital currencies and their possible deployment. In remarks made this month to the Consensus 2020 virtual conference, European Central Bank Executive Board Member Yves Mersch noted that about 80 percent of 66 central banks queried by the Bank of International Settlements (BIS) are working on central bank digital currencies (CBDC).

Mersch noted that there is a “lack of a concrete ‘business case’” for central bank digital currencies right now, but that shouldn’t stop the serious exploration of how to design them.

“A wholesale CBDC, restricted to a limited group of financial counterparties, would be largely business as usual,” he said. “However, a retail CBDC accessible to all would be a game-changer. So a retail CBDC is now [the ECB’s] main focus.”

Mersch added that a retail CBDC could be based on deposit accounts with the central bank. “Though involving vast numbers of accounts, it would not be a particularly innovative option from a technological viewpoint. For the euro area, it would basically mean increasing the number of current deposit accounts offered from around 10,000 to between 300 million and 500 million.

“A CBDC of this nature would enable the central bank to register transfers between users, thereby providing protection against money laundering and other illicit uses (or those considered illicit by the rulers of the day), depending on the degree of privacy granted to users,” the ECB member said.

China is already in the midst of a pilot program that will trial a digital yuan with 19 firms, among them Subway, McDonald’s and Starbucks. The country expects to launch the digital currency later this year or early next year.

Should those efforts prove to be successful, we’d wager that the United States and other countries’ efforts toward digital currencies would accelerate, and the Visa patent filing might point the way toward joint public/private initiatives.

Add it all up, and the fate of fiat currency done electronically might be less a question of “whether” or even “why,” and more a question of simply “when.”