By Caitlin Ostroff
Central banks around the world are weighing introducing a new
kind of money, known as digital currency.
China has been at the forefront of such efforts. In April,
Beijing said it would expand its pilot program for a homegrown
electronic-payment system, which shares some features with bitcoin
and other private cryptocurrencies, to a number of large
cities.
Even the Federal Reserve, which has long said it doesn't have
plans to launch a digital currency, plans to build and test a
hypothetical design. Fed Chairman Jerome Powell cautioned Monday
that a "great deal of work" needs to be done before the central
bank would decide to launch a digital dollar.
Here is what you need to know.
Why do central banks want to introduce digital currencies?
The pandemic is accelerating a shift away from the use of
physical cash in most developed economies, with alternative payment
methods or private cryptocurrencies potentially taking its
place.
Central banks are exploring ways to create a digital version of
cash: money that is trusted, convenient to use and widely available
to people, for making payments and getting paid. Digital currencies
have the potential to make it easier, cheaper and faster to move
money around.
If foreign countries issue their own digital currencies, or if
private cryptocurrencies were to gain popularity, they could eat
into use of the traditional forms of money issued by central banks,
and pose a threat to policy makers' ability to transmit monetary
policy.
Are any digital currencies currently available?
Bitcoin is called a digital currency, but it is nothing like the
money you carry. It is a computer program that allows two people
anywhere in the world to exchange value across the internet in
minutes.
Unlike traditional money, bitcoin and other cryptocurrencies
aren't issued by countries or central banks. On the contrary, one
of the hallmarks of these products is the lack of regulation and
oversight by a central authority.
Individuals and companies use powerful specialized computers to
solve a computational puzzle and "extract" or "mine" new bitcoin.
Users of the currency verify transactions with a permanent,
inalterable public ledger, which anybody can view and analyze at
any time.
No major central bank in the world has yet introduced its own
digital currency.
Why has bitcoin not become a popular payment method?
Most retailers don't allow the cryptocurrency to be used for
general transactions, such as buying groceries, because there is no
guarantee that bitcoin can be easily exchanged for more traditional
forms of money at a predictable price.
Buyers and sellers also haven't embraced bitcoin as a way to pay
because the price is volatile. At present, one bitcoin is worth
about $12,175. Just this year, its value has ranged from as low as
$4,945 apiece to as high as $12,399, according to CoinDesk.
Bitcoin has also gained an unsavory reputation, because it is
effectively anonymous. Anyone with a computer and an internet
connection can download the software. Unlike opening up a bank
account, users don't have to provide any identifying information to
start a cryptocurrency account. That is also making it challenging
for authorities to track, trace and crackdown on malicious actors
using cryptocurrencies.
With the backing of central banks, digital currencies are likely
to be more palatable to both merchants and the general population
than bitcoin and other private cryptocurrencies, said Carlo
Cocuzzo, an economist at ING Bank.
What is bitcoin used for?
Instead of being used as money, to make payments or exchange
value, bitcoin is considered a financial asset by most of its
users. They are betting that the value will climb as the
cryptocurrency remains scarce, with the underlying blockchain
technology allowing for new uses of bitcoin over time.
Why are central banks exploring new electronic payment
systems?
Traditional American banks have been slow to introduce apps and
software that allow peer-to-peer payments for things like splitting
the bill on a meal, or paying someone for a coffee.
That has allowed apps like PayPal Holdings Inc.'s Venmo to gain
popularity. They provide a secure means to move money between bank
accounts, ensuring there are sufficient funds to meet the claim.
These services typically charge a fee, and can still require days
for funds to be transferred.
Behind the scenes, most financial transactions -- whether using
a credit card, sending money to a relative, or buying something
online -- involve settling payments over a patchwork of
systems.
Middlemen include payment processing companies such as PayPal or
Stripe Inc., as well as card networks owned by Visa Inc. or
Mastercard Inc. The payment is ultimately routed through banks, who
sort and settle the transactions, and typically collect fees from
merchants for offering the service.
That means money can take two or three days to move between
accounts.
Why would making payments become faster and cheaper?
Central banks could directly issue their digital currencies into
users' online wallets without involving banks and other middlemen,
under some of the proposals being considered.
Americans could also potentially hold accounts at the Fed for
making transactions using a digital dollar, simplifying the process
and lowering the cost of exchanging payments.
Such a system could possibly have helped the government send
stimulus money to American households, or aid to small businesses,
faster in recent months.
What other benefits could digital currencies offer?
Digital currencies are likely to give central banks more insight
into the movement of money in the economy. The widespread use of
electronic payment systems may also aid authorities crack down on
money-laundering and terrorist-financing efforts.
People who don't have bank accounts may gain access to more
financial services through this new form of money. Many hundreds of
millions in poorer nations are completely untethered to the modern
financial system, making financial inclusion an urgent target for
central banks in emerging markets.
Digital currencies issued by central banks could also help
improve the effectiveness of monetary policy by allowing a central
bank to change rates directly on accounts holding the product,
bypassing financial markets.
What are the risks?
One of the key questions that central banks are trying to
address is how to avoid destabilizing their economy and financial
markets.
If a new monetary structure designed around digital currencies
allows Americans to maintain their savings and current accounts
directly with the Fed, commercial banks could lose retail deposits,
which are their most stable source of funding. Because of this,
central banks are talking about limiting the scope of central bank
digital currencies, perhaps by imposing a cap on how much money
could be kept in a central bank account.
There are also growing concerns about privacy and digital
surveillance, as the government would be able to track payments
made using these new currencies. In addition, some people worry
that central banks could impose subzero rates on ordinary people's
deposits.
Mr. Powell also cautioned on Monday that the Fed must consider
the risk of cyberattacks, counterfeiting and fraud, as well as the
impact on monetary policy and financial stability.
"We do think it is more important to get it right than to be the
first," he said.
Write to Caitlin Ostroff at caitlin.ostroff@wsj.com
(END) Dow Jones Newswires
October 21, 2020 10:53 ET (14:53 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.