Can Central Bank Digital Currencies Improve Monetary Policies?

Banks are certainly not sitting on the sidelines, especially as some central banks such as China’s PBoC are developing cryptocurrency projects since 2014. In an effort to turn disruptive technologies simply into technologies, financial institutions will adopt blockchain and cryptocurrencies. However, can central bank digital currencies tame a wild beast and do they have some additional benefits?

Initially laughed off by financial institutions, cryptocurrencies have caught the attention of banks after years of development and success. Instead of fighting the ever-rising disruptive technology, banks have decided to adopt cryptocurrencies and blockchain technology by planning to issue central bank digital currencies (CBDC).

In 2017, the Bank of England was one of the first central banks to discuss the potential of a bank-issued cryptocurrency. China, who will soon release their own CBDC, started developing their own project in 2014 in an attempt to protect its own monetary policy against the eventual global adoption of the new digital asset class.

On 12 September 2019, the central bank governor of Chile Mario Marcel held a speech at the OECD Global Blockchain Policy Forum in Paris, discussing the prospects of integrating disruptive fintech technologies into the traditional economy. Marcel stated that central bank digital currencies could provide a flexible tool at a time where nations issue ‘unconventional monetary policies.’

In his speech, Marcel stated that cryptocurrencies such as Bitcoin could provide benefits to the traditional financial system. He added that disruptive technologies could address some issues that we currently have, such as transparency, cost, speed, security, and access.

In an effort to prevent disruptive technologies from being disruptive, the governor said that banks should adopt them to prevent instability in the economy and that both distributed ledger technology (DLT) and central bank digital currencies could ‘enhance market efficiency.’

Referring to recent unconventional monetary policies, Marcel noted that cryptocurrencies could be a key-tool for fixing negative nominal interest rates. However, the Chilean governor added that digital currencies should be further researched as there are possible drawbacks, and that central bank digital currencies do not really have to implement blockchain technology. In the end, he acknowledged that blockchain could make monetary policymakers ‘faster and more powerful.’

Earlier today, CEO and founder of crypto exchange Binance, Changpeng Zhao, commented on the future release of China’s CBDC, stating that it is ‘a very good thing for the industry.’ As the project is set to launch as early as 11 November, we may soon get a glimpse of how effective cryptocurrencies can be when adopted by the banking system.

However, in Europe, a recent ING crypto report suggested that bank-issued cryptocurrencies may have to face some challenges to reach high adoption rates. After all, when being asked whether they liked the idea of having cryptocurrencies managed by a bank, only 27% of Europeans responded positively, while 40% were against it. Banks might therefore still have some convincing to do.