Group of experts: Central bank digital currency – Operation and experimentation

14 Jun, 2021

The rise of digital currencies – private and governmental (more precisely, the central bank) and the need for digital payments has been creating challenges for traditional monetary policy.

The interest in central bank digital currency (CBDC) is increasing, stemming from the USD's perceived "problems," currency and monetary policy crises, , the race to pump money from QE packages (quantitative easing) and rescue packages in the form of “helicopter drops” after the 2008 global financial crisis and the COVID-19 pandemic . It requires future policymakers to prepare knowledge to be able to participate in the “new game”.

The question is, should we launch a CBDC in each country? Or should we equip ourselves to be able to foresee risks and manage them appropriately?

To answer that big question, we should first find out why considering the birth of a CBDC is a hot issue as well as distinguishing how the CBDC operating mechanism is different from that of a traditional currency to better understand CBDC, including changing pressures at the international level.

A compilation of reports shows that central banks' pursuit of CBDCs stemming from the currency's potential benefits is primarily aimed at solving existing problems. Potential benefits of CBDCs include: (1) Increased accessibility and availability of financial products and services (financial inclusion); (2) Strengthening the transmission of monetary policy (monetary policy transmission); (3) Payment safety and efficiency; and (4) Availability of cash. However, according to economists, for CBDC we should not only focus on the potential benefits but also look at the potential risks of this currencyand carefully consider the possible trade-offs.

Should there be a national central bank digital currency for each country?

At the retail level, CBDC will provide some advantages and operate similarly to a credit card in term of payment. It can support the poor and other members in the society, the government in transfering social benefits and significantly reducing the cost of cross-border transactions. But for the CBDC to work well, a basic principle must be met,: there will need to be a balance between anonymity (anonymity or privacy) and control of the system (control of the system).

The trend towards the birth of national-level CBDCs is obvious and unavoidable. Competition between countries over the role of future CBDC is more evident than ever. Will central banks be willing to accept payments in CBCD digital currencies from different central banks? Can countries still maintain control of their money supply once the money supply is implemented in digital form? Without a high degree of global cooperation, coordination and management, major central banks (such as the Fed) would be unlikely to be willing to underwrite the international financial system.

But the trend seems unlikely to change – CBDC coins will almost certainly continue to be developed. The question is whether the problems of these coins will be able to be solved before the transition to the new system is made. The introduction of a CBDC currency could help improve the financial system. But, most experts warn that the coin should not take shape until there are guarantees of credit allocation, the system payments, financial stability safeguards, and other aspects of the new system are up and running, at least until all of these run smoothly under the current system.

► See more details of Mr. Chau Van Thanh's article "Central Bank Digital Currency: Operation and experimentation". This article is for teaching and research purposes, updated on May 27, 2021.

Author: Chau Van Thanh, lecturer in Economics, UEH School of Economics

Source: UEH School of Economics