In the coming year, central banks around the world will be heading in different directions when it comes to digital currencies. It’s not about interest rates or quantitative easing, but about technology.
Over the past twelve months, some of the world’s largest central banks have made significant progress in the field of central bank digital currencies (CBDCs) and fast payment systems. This includes the European Central Bank (ECB), the Bank of England, the Bank of Japan, the Reserve Bank of India, and the People’s Bank of China.
Research from the Atlantic Council’s GeoEconomics Center shows that in India, tests of the digital rupee project are being scaled and processed by commercial banks across the country, with over a million transactions per day. In the eurozone, the ECB is now in the preparatory phase for introducing its own digital currency. On January 1st, the bank presented a detailed plan of action for the next year, including testing the digital euro and working with private sector companies to develop key features of the project, such as offline payments and fraud prevention. Interestingly, discussions among central bankers in Germany, France, and Italy are focused on setting limits on individual wallets and selecting commercial banks to collaborate with the ECB. The fact is that central banks and regulators in the G20 group have moved beyond theoretical discussions about the benefits and concerns of CBDCs and are now moving towards testing and piloting the technology to see what works and what doesn’t.
Interestingly, these new pilot programs are not limited to wholesale (banking) or retail (daily) CBDCs. Central banks are also investing in new technologies to “prepare” their currencies for the development of blockchain, artificial intelligence, and quantum computing – all innovations that can affect how people use money, both legally and illegally.
Unfortunately, the Federal Reserve of the United States does not appear to be moving in the same direction. Currently, innovations in technological payments at the Fed are lagging behind the competition and other central banks. This can be assessed based on the resources available in the organization for research and development. For example, the People’s Bank of China has over three hundred employees dedicated to digital currency, while the Federal Reserve has significantly fewer, less than twenty. The Bank of England has an official joint mandate between the Treasury and Parliament and a dedicated website where it answers frequently asked questions. The innovation gap is not only limited to CBDCs. The FedNow interbank settlement system, which has been anticipated for some time, is several years behind the appropriate systems in Europe and is currently not widely popular.
Seemingly, some people within the Fed and on Capitol Hill believe that the dollar does not need to innovate. This is a mistaken belief.
When considering innovation, the authorities in the United States should drive payment development from a position of strength. As the issuer of the world’s reserve currency, the Fed has a unique opportunity to set standards and influence constructive directions for future payment development. By leveraging its influence in the International Monetary Fund, G20, and the Committee on Payments and Market Infrastructure, the United States can contribute to shaping these standards. However, the Fed, in collaboration with the Treasury Department and other parts of the government, must present options and technological solutions to influence change. Without their leadership, others will fill this void.
The dominance monitoring of the dollar developed by the GeoEconomics Center shows that new alternative financial systems are emerging worldwide, including China’s own version. These systems should be thought of as building pipelines. Building pipelines takes time, but once the water is turned on, changes happen very quickly. If these international systems are built without the involvement of the United States and the dollar, the way the dollar is used in trade, reserves, and especially in enforcing sanctions may significantly change.
While many are trying to fill the innovation gap, including the Bank for International Settlements, the ECB, and the Reserve Bank of India, none of them can replace the issuer of the world’s reserve currency.
What is concerning about the Fed’s approach is the fact that central banks around the world are asking for help from the Fed.
FAQ
1. What are Central Bank Digital Currencies (CBDCs)?
– CBDCs are digital versions of traditional currencies issued by central banks. They are different from cryptocurrencies like bitcoin.
2. Which central banks have made progress in CBDCs and fast payments?
– The European Central Bank (ECB), the Bank of England, the Bank of Japan, the Reserve Bank of India, and the People’s Bank of China have made significant progress in this area.
3. What progress has the ECB made in CBDCs?
– The ECB is in the preparatory phase for introducing its own digital currency. It plans to test the digital euro and collaborate with private sector companies to develop key features of the project.
4. What technologies are central banks investing in regarding currency development?
– Central banks are investing in technologies such as blockchain, artificial intelligence, and quantum computing to prepare their currencies for potential changes in how money is used.
5. What challenges does the Federal Reserve of the United States (Fed) face in terms of innovation?
– The Fed lags behind other central banks and competition in terms of innovation in technological payments. It lacks sufficient resources for research and development.
6. What opportunities does the Fed have to drive payment development?
– As the issuer of the world’s reserve currency, the Fed has the opportunity to set standards and influence the direction of payment development in the future through cooperation with international organizations and the government.
7. What consequences could a lack of innovation in payments have for the dollar and the United States?
– If alternative financial systems are built without the involvement of the United States and the dollar, it could significantly impact how the dollar is used in trade, reserves, and enforcing sanctions.
8. Which central banks are asking for help from the Federal Reserve of the United States?
– Central banks around the world are seeking assistance from the Fed in various areas.
Definitions
– Central Bank Digital Currencies (CBDCs) – Digital versions of traditional currencies issued by central banks.
– Blockchain – A technology that enables secure and immutable storage of transactions.
– Artificial Intelligence – The branch of computer science that deals with creating intelligent systems and algorithms.
– Quantum Computing – Computers that utilize the principles of quantum physics to process large amounts of data simultaneously.
Related Links to Main Domain Pages
– European Central Bank
– Bank of England
– Bank of Japan
– Reserve Bank of India
– People’s Bank of China
The source of the article is from the blog foodnext.nl