Big role for central banks in digital currency

The Bank for International Settlements and seven central banks recently issued a report to promote the development of digital currencies and international payments.

According to a BIS survey, 80 percent of central banks have carried out research and development on digital currencies and some have even begun trials.

Since early 2020, China has been experimenting with the central bank's digital currency in four cities, and has started testing digital renminbi application in some banks, drawing the attention of banks across the world.

The outbreak of the novel coronavirus has necessitated paperless transactions to reduce exposure to paper notes. The rapid development of private digital currencies in recent years makes it clear to central banks that national sovereign currencies face competition and risks in the absence of research and development on the digital currency front.

Central banks' digital currencies have obvious advantages over traditional digital currencies. They can support a flexible, innovative and competitive payment pattern to meet future payment needs, such as for the development of the digital economy, and make cross-border payments easier.

Central bank digital currencies also have the edge in precision and flexibility, giving the authorities more ways to uphold monetary and financial stability. As an effective carrier of the flexible interest rate policy, central banks' digital currencies can have positive, zero or negative interest rates.

After central banks are directly integrated with the intermediary banking business, they will play a new role in the banking system and economic activities, such as when calculating interest on digital currencies held by individuals and companies.

However, accelerated efforts by global central banks for research and development on digital currencies also expose the problems of integration and development of the international monetary system in the future.

Different central banks have different ideas about the operation mechanism for digital currencies, including whether to use blockchain technology. They also differ on the main applications, the amount of transfer and storage, and the accounting mode.

Given that digital currencies promoted by central banks are mainly for domestic use, considerations should also be given to how these digital currencies can be designed to operate with other central bank digital currencies' payment systems to support cross-border payments in the future. How far digital currencies can go will depend on the digitalization process and fintech strength of different countries, and how self-oriented they are in the future international financial order.