Central bank digital currencies could be the future of finance. Goldman Sachs analysts break down how they might work
- Central banks around the world are testing
digital currencies, in what could be a major shift.
- Goldman analysts broke down the state of play with digital currencies on Tuesday.
- They stressed that central banks want to avoid hurting the commercial lending sector.
Central banks around the world are racing to test and launch their own digital currencies, with policymakers worried about threats from
However, central bank digital currencies (or CBDCs) are far from straightforward. Central banks are currently working hard on how they should be designed, and how to stop them threatening the traditional financial sector, among many other issues.
"It has become clear that many central bankers are also motivated by concern that private cryptocurrencies, or stablecoins, or even foreign CBDCs could displace use of the national currency," they added.In developing economies, central banks think CBDCs could increase access to the financial system and payments efficiency. Which countries are planning CBDCs?
Goldman said 19 countries already have pilot projects and two have launched CBDCs for public use: the Bahamas and Cambodia.
More than 25 other countries or economic areas, such as the US and eurozone, are researching CBDCs.However, the Fed has so far appeared relaxed about digital currencies, saying it is more important "to get it right than be first." Goldman's analysts said the Fed is likely years away from making a final decision on a digital dollar.
What might CBDCs look like?
Goldman's research showed that central banks are converging on a number of features for CBDCs.A key one is that more banks are considering using a decentralized clearing system, as opposed to the traditional system that inserts a central authority into the payments process. This would make CBDCs akin to cryptocurrencies such as bitcoin, where there is no central authority that keeps tabs on transactions, but complex cryptography maintains the network's safety using a system known as a distributed ledger.
Most countries have so far opted for systems where people would have accounts at commercial banks, rather than holding CBDCs directly at the central bank, Goldman said. And several central banks have decided that their CBDC will not pay interest.What are the dangers of CBDCs?
The decisions to include commercial banks and not pay interest stems from the danger that CBDCs could seriously disrupt the traditional financial system by cutting out main street lenders, Goldman said.To address this problem of "disintermediation", central banks are also considering setting a penalty rate on holdings above a certain threshold so as to discourage large deposits. The eurozone, China and Sweden are considering balance caps. CBDCs may also encourage criminal activity by making anonymous transactions relatively straightforward to complete. Central banks have therefore mostly decided against fully anonymous accounts, Goldman said.
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