Should central banks issue digital currencies? Clearly identifying the points at issue and discussing them from every angle is important.
The Bank of Japan announced that it will start making a study of digital currencies, together with five overseas central banks, including the European Central Bank and the Bank of England. They will compile a report within this year.
With technological innovations progressing rapidly, it is perfectly possible that central banks will be pressed to issue digital currencies in the future. It is significant for major central banks to share experiences and opinions on technical issues and possible impacts on the real economy before it is too late.
Cashless settlements using smartphones and credit cards are already becoming popular. It is necessary to thoroughly examine both the merits and demerits of central banks’ issuing their digital currencies, at a time when settlement infrastructure has been developed.
Cashless settlements are, in many cases, transacted via private bank accounts. But settlements using the digital currency of a central bank are envisaged to be carried out through a direct exchange of “a sort of electronic cash” between users, using smartphones and other devices.
While details of the settlement mechanism remain unclear, it is expected to have the effect of keeping settlement costs down, as it would not require the services of any intermediary settlement businesses, including banks.
Digital currencies of central banks would differ from crypto assets or virtual currencies, such as bitcoin, in that they are legal tender, just like the dollar and yen.
Should money issued by the private sector — such as cryptocurrencies — and not governed by a state or a central bank become widespread, not only would the efficacy of monetary policy of central banks be eroded, but there is also fear that it would be misused for money laundering and tax evasion.
In particular, the Libra cryptocurrency, whose issuance project has been led by Facebook, Inc. of the United States, is envisaged for use in financial settlements. Before that becomes widely popular, central banks want to explore the possibility of issuing their own, trustworthy digital currencies. Such motives have probably led to the joint study by these central banks.
Not to be overlooked is the move being made by China.
The People’s Bank of China has entered a preparatory phase for issuing a digital renminbi. For the time being, the bank is expected to have it “circulate” within the country. Yet China may aim at eventually having its digital currency be used more widely, including for international settlements, thus demonstrating a greater presence than that of the yen, euro or British pound.
However, there are many issues to be solved before the issuance of central bank digital currencies.
One possibility that has been pointed out is that in the event of a financial crisis at a commercial bank, there could be a rapid shift of funds from the private bank deposits to central bank digital currencies. If financial institutions with difficulty raising funds consequently rush to tighten their lending, an economic recession could be brought about.
Also, how should the private information of those who hold digital currencies be managed and protected? Can sufficient measures be implemented to deal with counterfeit currencies? Studies from wide perspectives should be advanced.