Following the popularity of bitcoin and digital currencies in general, central banks have often faced with the tough decision whether to issue a regulated digital currency or not. Though there have been strong arguments on both sides of the divide—for and against—most central banks remain undecided and those that have mulled it seem hesitant.
A new research conducted by technology giants and blockchain proponents IBM has revealed that major global banks and financial institutions would support a digital currency issued by central banks.
According to the report of the study which was published on Thursday, Oct. 25, the participating financial institutions believe that central banks should issue state-owned digital currencies.
The research was jointly carried undertaken by IBM Blockchain World Wire and the Official Monetary and Financial Institutions Forum (OMFIF). The study involved 21 central banks which were initially part of a research conducted by OMFIF between July and September last year.
According to the results from the study, the report indicates that the participants were divided regarding the best approach towards government-issued CBDCs—whether they should actively pursue it or not. More than half of the participants agreed that central banks should issue their own digital currencies. The study found out that 38 percent of the participating financial institutions are already exploring the development of CBDC. Some of them have conducted trials towards an issuance.
Benefits of Central Bank Digital Currency
The report also looked into the relevance and various approaches towards distributed ledger technologies (DLTs).
Michelle Bullock, Reserve Bank of Australia noted that DLTs are “widely regarded” in cross-border payments because it brings speed and efficiency to the current process which is “slow, costly and involving significant compliance burden and a number of different financial institutions in different jurisdictions.”
The report also noted:
“One of the reasons for the interest in DLT is that many central bank-operated wholesale payment systems are at the end of their technological life cycles. The systems are programmed in obsolete languages or use database designs that are no longer fit for purpose and are costly to maintain.”
The report also explained that a central bank digital currency can come in two forms viz; a retail CBDC which would effectively replace fiat currency or a wholesale CBDC which would replace the reserves held by the central bank and used for interbank clearance and settlements.
While a retail CBDC seems farfetched, several financial institutions are already adopting DLTs for cross-border settlements. Some have signaled interest in Ripple’s product x-rapid which uses its native token, the XRP to facilitate and settle transactions.
Blockchain Poses a Challenge to Central Banks
The report, however, questioned the ultimate relevance of blockchain-enabled CBDC which relies on the characteristic of blockchain the removes the need for trust between transacting parties or a trusted third party. In this light, 76 percent of participants expressed uncertainty about the efficiency of distributed ledger technology (DLT) deployments. The report read:
“And it may not be necessary to apply blockchain to these currencies since central banks – as ledger keepers – are considered sufficiently trustworthy already.”
Earlier this week, Craig Ramsey, a senior executive at HSBC echoes these fears stating that CBDCs and blockchain deployments pose a great challenge to existing real-time gross settlement (RTGS) systems.