In Short

Are central bank digital currencies the future of money?

A technician on a cherry picker inspects racks of illuminated mining rigs at the Minto cryptocurrency mining center in Nadvoitsy, Russia. The rise of Bitcoin and other cryptocurrencies has prompted the greatest push yet among central banks to develop their own digital currencies. PHOTO: BLOOMBERG

In Short brings to you selected Opinion pieces in bite-sized portions. This is a shorter version of the full commentary.

Is the future of money spelled C-B-D-C?

Not quite, according to the United States Federal Reserve. Its long-awaited (and long-delayed) paper released in January debated the pros and cons of creating a US central bank digital currency (CBDC), but stopped short of a firm commitment.

It stressed that clear support for CBDCs is needed from both the executive branch and Congress; and it will take further steps only if research shows that the overall benefits exceed the risks, and that a CBDC is superior to alternatives.

The reasons for the hesitance? The anonymity of some CBDC systems makes it difficult to enforce anti-money laundering and sanctions. Like existing payment systems, CBDCs also face operational and cybersecurity risks.

Then there is the risk of bank runs, where people withdraw their bank deposits to put into CBDCs or new private forms of digital money.

If there is a significant migration to CBDCs, this could shrink commercial bank deposits, reduce aggregate lending, discourage other forms of financial intermediation, and dampen economic growth.

But there are also benefits:

  • CBDCs offer the general public broad access to digital money that is free from credit risk and liquidity risk
  • They improve cross-border payments by using new technologies and inter-operable distribution channels
  • They promote financial inclusion by lowering transaction costs for lower-income households.

So if countries like the US are taking a wait-and-see approach, what is Singapore's take on CBDCs?

The official consensus is that there is no pressing need for a retail CBDC - as retail payments here are generally efficient and cheap, and the Singapore dollar remains fundamentally sound.

But a retail CBDC could be useful in a few ways:

  • Make it easier for smaller firms here to build new payments and related digital services by integrating with the CBDC, instead of having to build their own e-money and user base from scratch
  • Preserve the relevance and accessibility of central bank money as the economy digitalises
  • Protect consumers and merchants as e-commerce grows.

CBDCs are undoubtedly an important development in the future of money. But for now, they complement rather than substitute existing forms of payment.

More work also has to be done to understand their implications for monetary policy, liquidity management and financial system stability.

And with countries having different payments infrastructures, cash usage and levels of financial inclusion, it is genuine policy need, not the technology itself, that should be the key driver of individual governments' decisions on whether to adopt CBDCs and the speed of adoption.

For more on how governments around the world are responding to CBDCs, read the full commentary here.

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