2017 looks to be shaping up as a watershed year for blockchain-driven central bank digital currencies with China reportedly moving closer to becoming the first major economy in the world to issue its own virtual currency and several other countries including Sweden and South Africa very seriously looking to do the same.
According to a report in Caixin, a Chinese online financial news and information site, the People’s Bank of China recently completed a successful trial in the transaction and settlement of bank acceptance bills using a blockchain-driven digital currency it developed in-house.
Citing PBOC sources, the Caixin report says institutional transaction partners in the trial in December 2016 included several commercial banks, including the Industrial and Commercial Bank of China, Bank of China and the private WeBank.
Caixin notes the trial reflects a stepping up of efforts by Chinese monetary authorities to develop government-backed sovereign digital currency in response to the rise of bitcoin, which does not have official backing in China and is banned by its regulators for use by financial institutions.
Citing sources close to the PBOC, Caixin says that going forwards the central bank’s intention is to connect its pilot digital bank acceptance exchange platform with the existing Shanghai Commercial Paper Exchange to form a national platform for bank bill transactions.
The PBOC intends that China’s digital money will be legal tender backed by the central government, unlike bitcoin, which can be sold and transferred without a bank. The bank foresees that in the future both (fiat) digital and paper currency will be in circulation in the country.
The PBOC’s efforts to develop the digital currency date back several years. It believes digital currency can help reduce circulation costs, increase transparency and curb money laundering and tax evasion.
Several other central banks are moving towards developing their own digital currencies. In early February South African online investment information website Moneyweb revealed that the South African Reserve Bank (Sarb) is open to issuing a national digital currency driven by blockchain. The report says Sarb is keeping a close eye on moves by other countries to issue fiat currency while at the same investigating the merits of such a move for South Africa.
Elsewhere, some smaller economies, including Senegal, Barbados and Tunisia, have already launched blockchain-based digital currencies whilst among the major central banks, Sweden’s is considering issuing an eKrona. Others showing great interest include the Bank of England, the Banque de France, the Bank of Canada, the Central bank of Russia, the Dutch central bank, and the US Federal Reserve.
Big economic benefits
The Bank of England, one of the first central banks to highlight the potential of blockchain or distributed ledger technology to drive fiat digital currencies, last year published a widely cited research paper on the macroeconomic implications of central banks issuing virtual cash. The paper, authored by two BoE researchers, John Barrdear and Michael Kumhof, envisages such a digital currency would be “a universally accessible and interest-bearing central bank liability, implemented via distributed ledgers, that competes with bank deposits as medium of exchange”. Their underlying model assumes the digital cash would be created by the central bank only when it buys bonds from households or investors.
Based on their simulations, Barrdear and Kumhof conclude there are several potential benefits from central bank digital currency issuance of 30% of GDP against government bonds. Firstly, their model generates an increase in the steady-state level of GDP of almost 3% due to reductions in real interest rates, distortionary tax rates, and monetary transaction costs. Secondly, the model also suggests a central bank digital currency regime could contribute to the stabilisation of the business cycle by giving policymakers access to a second policy instrument that controls either the quantity or the price of the fiat digital current in a countercyclical fashion.
On the negative side, the study says there remains a clear concern with the proper management of the risks involved in transitioning to a different monetary and financial regime.