Why Central Banks Want To Get Into Digital Currencies - YouTube

Bitcoin is booming.

We are going to look at cryptocurrency and or Bitcoin in terms of a currency to transact.

Believe it or not, we've sold 17 cars, Bentleys and Rolls, with Bitcoin.

Musk is driving so much of this market.

It's fascinating. There's been a lot of news about digital currencies lately.

Companies like Tesla, Square and PayPal have been getting into cryptocurrencies in a big way, with

big, billion dollar bets on bitcoin specifically.

Whether all this turns Bitcoin into a viable currency instead of a speculative investment or a

store of value remains to be seen, but there's a growing number of governments around the world who

aren't going to wait around.

The Bank of England is looking into its own digital currency.

Sweden's central bank is testing an E-krona and emerging economies have introduced pilot programs.

In 2020, about 60 percent of the world's 65 central banks surveyed said they're running

experiments on CBDC.

That's up 18 percent compared to 2019.

Advocates say digital money can make cross-border payments easier, promote financial inclusion and

payment system stability.

But there's also a host of serious risks.

Surveillance and privacy issues could arise if the central bank is able to monitor every

transaction. You know, it is being implemented across the world.

China's experiment is very large scale.

When the world arrives in Beijing next winter for the Winter Olympics, they are going to be using

the new digital RMB to shop and to stay in hotels and buy meals at restaurants.

The world is going to see a functioning CBDC see very soon, within the coming year.

A central bank digital currency, or CBDC, is a digital form of a country's currency operated by

the central bank. Similar to cash, the central bank would issue its digital currency to allow

people to make everyday transactions.

Big-name investors and big-name companies are now pouring money into bitcoin.

It's adding mainstream credibility to the famously volatile digital currency.

Citibank recently said Bitcoin could become the, quote, currency of choice for global trade.

All of this is forcing the Fed to get more serious about the digital dollar.

The U.S. also faces pressure from competitors like China, which has been ahead of its own

digital currency development.

China is actually very much driving, I think, a lot of the agenda around central bank digital

currency. They've been testing their version of a central bank digital currency, the DCEP, which

stands for digital currency electronic payment.

China has been researching how it could create a digital yuan.

The country has set up massive pilot testing in major cities in the past.

On February 4th, China's central bank also set up a joint venture with SWIFT, the global system for

financial messaging and cross-border payments.

Many governments, including the U.K., Sweden, Hong Kong, Australia and the U.S., are all

exploring ways digital currency could work.

The European Central Bank is working with the European Commission in experiments to consider the

benefits of a digital euro.

It'll decide whether to launch the digital euro in mid 2021.

Sweden, which has one of the lowest usage rates of cash, launched a pilot program for its digital

currency known as E Krona in 2019.

And in Hong Kong, an experiment using digital currency to settle cross-border transactions

between Thailand is being expanded.

In terms of human and institutional engagement, t he United States is

certainly behind the scale and the scope of what China is doing, what Europe is doing, what

Singapore and other individual nations are doing.

But, you know, I've never felt that being first or second is what's important here.

It's not about being there first.

It's about doing it right.

Central bank digital currencies would operate just like the money you see when you check your bank

accounts online. The digital dollars would be issued by the central bank and held directly in a

citizen's digital wallet.

Instead of printing physical money, the central bank would use electronic coins or notes.

The digital wallet would be accessible through smartphones.

Governments could also decide whether they want its citizens to create a direct account with its

central banks or operate the digital currency through existing financial institutions.

It is my understanding that many governments in Europe and also in Canada, they have considered

their first option.

They really want to feel more like the direct relationship with the person because they have

experienced this need during covid to distribute a lot of funds to people.

And they literally didn't know where they hold accounts, how to reach them.

China's digital yuan is not based on blockchain, the digital ledger technology underpinning

cryptocurrency such as bitcoin.

Put simply, blockchain is a permanent record of transactions linked an order, or a chain, to act

as a timeline or a ledger.

And in bitcoin's case, it's purposely decentralized.

Central bank digital currencies can be blockchain based or not, depending on the design.

China's digital yuan works very similarly to its existing commercial digital payments, like Alipay

and WeChat Pay.

Users download digital wallets on their phones where they can store their funds.

This generates a QR code, which can be scanned by payment terminals and shops to pay for things like

food and retail items.

They have that ecosystem where WeChat and Alipay enabled the use of the digital yuan.

They had the ability for people who are already quite comfortable with that way of transacting.

One benefit central bank digital currencies could provide as lowering the cost of cross-border

payments. It's still five percent or more, on average, to send money from one country to

another, because of our antiquated correspondent banking system and the inefficiencies in our

payment system. That really especially hits people on the economic margins who are maybe

working overseas, trying to send money back to their families.

CBDCs can also promote financial inclusion similar to the success of M-Pesa, Kenya's mobile payment

service. Still, there's debate on how this would play out.

I think there is a huge debate around, for example, are you going to be required to produce a

ID and say proof of address to use central bank digital currency?

Today, I don't need to show ID or show proof of address to receive a cash payment.

There's a lot of risks associated with central bank digital currencies.

If we solely rely on digital currencies and there is a massive power outage or a hack, it could

jeopardize the entire system.

A single point of failure, say our grid goes down or the Internet goes down or something

catastrophic happens.

You don't really have a backup if you're fully digitized.

Most central banks say that it's likely CBDCs, if implemented, will coexist with other forms of

currency. There's another big concern that a central bank issued digital currency could cause a

bank run during economic instability.

Central bank issued digital currencies give people another place to store money.

These kinds of digital currencies would be considered extremely safe assets.

After all, they are being held with institutions like the U.S.

Federal Reserve, which isn't going out of business anytime soon.

In times of economic uncertainty, people may be more likely to pull their funds from commercial

banks, and quickly, then stockpile the safe digital currency stored at the Fed.

This can make the financial crisis more unstable.

Privacy can also become a huge issue, depending on how the digital currency is designed.

There is a danger that we might end up creating a central honeypot of data.

So I think we need to be really careful not to do that.

Payment data is really sensitive.

We don't want to gather a lot of it in one place and we need to think very carefully about how that

data is protected and whether or not someone needs to collect that data at all.

In August 2020, the Federal Reserve Bank of Boston announced a multi-year collaboration with MIT to

research central bank digital currency.

The research project would explore new and existing technologies to build and test a

hypothetical digital currency platform.

We are very much still in the research phase of this, and I think it's going to take at least a

few more years of research to really sort through some of these problems.

Our plans are to release our first prototype as open source code this upcoming summer of 2021.

And along with that, a white paper which describes a lot about what we've learned.

On February 24th, 2021, Fed Chairman Jerome Powell said the U.S.

central bank will engage with the public on the digital dollar this year.

This is going to be the year in which we engage with the public pretty actively.

We have a functioning financial system and a banking system.

We need to be careful with our design of the digital dollar and that we don't create something

that will undermine that very healthy market-basedfunction.

I think it's going to happen sooner than that, and the reason is because of this competitive

challenge from China and also this rapidly-growing cryptocurrency space, and the fact

that we are in a pandemic still.

And I think you're starting to see ideas like universal basic income and stimulus payments

become a more regular feature of our economy.