October 24, 2022 Connor Steens

THE DIGITIZATION OF CENTRAL BANK CURRENCIES

BY CONNOR STEENS

The digital assets market has seen a substantial amount of growth in recent years, reaching a market cap of $3 trillion globally in November last year. With millions around the globe actively involved in the market, it has been noted that 16% of all adult Americans have purchased or hold digital assets.

In March of 2022 Biden’s Executive Order 14067, “Ensuring Responsible Development of Digital Assets”, outlined the first whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology. While the potential benefits aim to keep the U.S. at the technological forefront of the global financial system, the real risks posed are evidenced in the instability of the crypto markets themselves, with the crash of TerraUSD (a proclaimed stablecoin) and the subsequent wave of events wiping out over $600 billion in investor and consumer funds.

In the following six months a comprehensive framework was developed to advance seven key priorities:

 • consumer and investor protection;

 • promoting financial stability;

 • countering illicit finance;

 • U.S. leadership in the global financial system and economic competitiveness;

 • financial inclusion;

 • responsible innovation; and

 • exploring a US CBDC.

Most notably was the mention of a U.S. Central Bank Digital Currency (CBDC), or a digital form of the U.S. dollar. While it hasn’t been confirmed whether or not the U.S. will actively pursue a CBDC, benefits have been distinguished along the lines of efficient and low cost transactions, improving access to the financial system, boosting economic growth and supporting the continued centrality of the U.S. within the international financial system.

While a CBDC will provide such benefits, public concerns surrounding CBDCs can be summarised by a quote from Agustin Carstens, General Manager of the Bank of International Settlements,

“We don’t know who’s using a $100 bill today and we don’t know who’s using a 1,000 peso bill today. The key difference with the CBDC is the central bank will have absolute control on the rules and regulations that will determine the use of that expression of central bank liability, and also we will have the technology to enforce that.”

Ultimately, having all transactions across the entire economy recorded on a single ledger will give almost perfect insight into the direction of the economy. As a programmable commodity, a CBDC could also come with an “expiry date” as explored by China with their digital yuan in 2021, essentially allowing for tighter control over domestic consumption. There is a fine balance to be met.

As a development, CBDC is one to keep an eye on with progress being made around the world, particularly in China, with their slow rollout of what is formally known as e-CNY, total transactions in which stood at $13.8 billion in April this year. The Chinese CBDC is issued by the People’s Bank of China and has been promoted with numerous campaigns such as lotteries and partnerships with tech giants Alibaba and WeChat, and is supported by an app that allows e-CNY payment for goods and services in 23 cities including Shanghai, Beijing, and Shenzen.

Research around the globe has been spurred this year and can be followed here: CBDC Tracker. The race is certainly on as governments realize the value and begin taking steps to reshape how people and businesses use money.

Connor Steens

Connor Steens works as an Analyst at Southpac Group. Connor has worked closely with Guy on investment an banking relationships. Connor currently oversees and monitors current marketing analytics, exposure and direction, content creation and market presence.
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