Central Bank-Issued Digital Currencies: Why Governments May Need Them

On October 20, The Bank of Japan's deputy governor, Masayoshi Amamiya, repeated his negative stance towards central bank-issued digital currencies, claiming that such digital currencies are unlikely to improve the existing monetary systems.

"The issuance of central bank digital currencies for general use could be analogous to allowing households and firms to directly have accounts in the central bank. This may have a large impact on the aforementioned two-tiered currency system and private banks' financial intermediation."

EU: Not ready for CBDCsThe European Union seems to have taken a wait-and-see approach in terms of CBDC. In September, the European Central Bank President, Mario Draghi, announced to the European Parliament that they have "No plans" to issue a digital currency.

The ECB executive elaborated by arguing that "Technologies which could potentially be used to issue a central bank digital currency, such as distributed ledgers, have not yet been thoroughly tested and require substantial further development" before the Central Bank would consider using them.

"With regard to the central bank administering individual accounts for households and companies, this would imply that the central bank would enter into competition for retail deposits with the banking sector and lead to potentially substantial operational costs and risks."

Other fears voiced by the Ministry included a central bank jeopardizing its independence - as it would allegedly get a stronger position in the financial system by issuing a cryptocurrency - and the crisis scenario in which the central bank hits bankruptcy faster and on a larger scale due to lower transaction costs, along with the classic ones: AML compliance and terrorist funding concerns.

Canada: CBDCs can bear interest, improve welfare gainsIn November 2017, the Bank of Canada published a report titled "Central Bank Digital Currency: Motivations and Implications," which was co-authored by its Currency Department employee.

The Bank of Canada report mentioned the lack of transaction fees and financial inclusion as other potential benefits of CBDC but highlighted anonymity as "Undesirable for central bank digital currency." The paper concluded that more research is needed to decide if the Bank of Canada should implement a CBDC.In July 2018, the Bank of Canada released yet another research.

"Why would the central bank want to ? If there's any sense of nervousness about the banks, you will have a bank run; everybody is going to go into the central bank And, if people placed their deposits with central banks, who's going to extend credit?".

EY India's Mahesh Makhija told the paper that "The idea of a central bank issued digital currency is very promising, though issues around digital counterfeiting will need to be addressed."