(Essay) Should countries introduce their own digital currency

The irony was not lost on the cryptocurrency communities when central banks (CBs)
announced the possibility of issuing Central Bank Digital Currencies (CBDCs) based off
distributed ledger technology, the technology that underpinned cryptocurrencies, which
was created to be autonomous and decentralized. Merits for adopting CBDCs range from
deterrence of illegal transactions to circumvention of the zero-lower bound in conventional
monetary policy. Notwithstanding, central bankers have to weigh these against their
disadvantages, both in good times and bad times, bearing in mind their operating
In recent years, the unprecedented growth of non-cash transaction volumes (Capgemini and
BNP Paribas, 2018), coupled with the declining currency-to-M2 ratios (Prasad, 2018),
highlighted the dwindling importance of physical fiat currencies. This phenomenon has
forced CBs such as Sweden’s Riksbank to consider issuing retail CBDC after the country’s
cash withdrawal had declined drastically and with merely 20% of all retail payments made in
cash (Sveriges Riksbank, 2018). However, the importance of considering a country’s
operating landscape cannot be further emphasized. A case in point was the 2016 banknotes
demonetization by India’s RBI, which demonstrated the disastrous outcome demonetization
can cause to a cash-based society that lacked the necessary infrastructure. Furthermore,
issuing retail CBDCs will mean that CBs, which currently work on wholesale banking
structures, will have to adapt to deal with retail individuals – something that they are illequipped to do. It is also worth appreciating the complexity involved in reversing a
transaction or cybercrimes on an immutable CBDC. Bearing in mind that majority of
payments and monies are already electronic, and that other alternatives exist, such as the
unification of retail payment methods (e.g. Singapore’s SGQR), issuing retail CBDCs provides
limited upside potential while exposing a country to significant financial instability during
crisis of confidence.
On the other hand, wholesale CBDCs (e.g. Singapore’s Project Ubin), designed for financial
institutions, such as banks or payment and settlement solution companies, may bring about
significant efficiency gains through the reduction in transaction costs and better
management of liquidity positions. However, if financial institutions are able to carry out
settlements without going through central banks, certain policy tools such as the varying of
short-term interest rates may be rendered inefficient. Notwithstanding, CBs may have more
resources to be diverted into promoting financial stability. For instance, should a CB decide
to transit from a Lender-of-Last-Resort model into a Pawnbroker-For-All-Seasons model, as
proposed by Mervyn King, more resources can be diverted into evaluating the collaterals
and appropriate haircuts.
Capgemini and BNP Paribas. (2018). World Payments Report 2017. Capgemini and BNP
Prasad, E. (2018). Central Banking in a Digital Age: Stock-taking and Preliminary Thoughts.
Washington: Hutchins Center on Fiscal & Monetary Policy at Brookings.
Sveriges Riksbank. (2018, February 1). Sveriges Riksbank. Retrieved from The Swedish
Payment Market: https://www.riksbank.se/en-gb/financial-stability/payments/theswedish-payment-market/
Bank of International Settlements. (2018). Central Bank Digital Currencies. Committee on
Payments and Markets Infrastructure.
Bank of International Settlements. (2017). Central Bank Cryptocurrencies. Bank of
International Settlements. Bank of International Settlements.
(Bank of International Settlements, 2018)
(Bank of International Settlements, 2017)