Report: 70% of Central Banks are Studying Digital Currencies

Approximately 70% of the banks surveyed by the Bank for International Settlements (BIS) said they have already started working on a central bank digital currency (CBDC) or they are considering the development of their own virtual currency.

50% Of Banks Surveyed Have Moved To "Proof-of Concept" Stage

The Bank for International Settlements (BIS) is an institution owned by major central banks worldwide and it focuses on providing improved “international monetary and financial cooperation.” There were reportedly a total of 63 banks that participated in BIS’ survey and these institutions represented jurisdictions covering over 80% of the world’s population. The banks responding to the survey account for over 90% of the global economic output.

As mentioned in a report published by BIS, the financial institution’s survey involved conducting conceptual research on the process of creating CBDCs. Several banks worked cooperatively to develop a “common understanding of this new field of study.” Around half, or 50%, of the respondents have now moved to “hands-on” proof-of-concept activities to determine the feasibility and desirability of introducing a CBDC.

IMF Head: CBDCs Are "Safe" And "Cheap"

85% of the banks surveyed by BIS said it is unlikely that they’ll issue their own virtual currency in the short-term, or the next 1-3 years.

As CryptoGlobe reported in mid-November 2018, Christine Lagarde, the head of the International Monetary Fund (IMF), had recommended that all financial insitutitions should consider launching their own digital currency. Lagarde believes blockchain-based currencies are “safe, cheap, and potentially semi-anonymous” and would help in “supplying money to the digital economy.

However, there are many other senior banking and traditional financial market professionals worldwide who think that both CBDCs and decentralized cryptocurrencies may not be beneficial to the world’s financial system. In September 2018, the European Central Bank (ECB) had clarified it was not planning to launch its own CBDC.

Uruguay And Sweden Have Reported Making Considerable Progress In Developing CBDC

As pointed out by the research group at the St. Louis Fed (in December 2018): 

Once you add a central bank and remove the “permissionless” network—with nodes that can leave and join as they wish, there isn’t much left to the cryptocurrency you started with.

Despite concerns regarding whether they’re appropriate for a centrally managed financial system, some central banks are still considering exploring the idea of a CBDC. The BIS report revealed that Uruguay’s central bank had been testing out a general purpose CBDC.

Notably, the BIS research report also mentioned that Uruguay and Sweden had made considerable progress in creating their own CBDC and they had also publicly shared most of their findings in order to help banks in other countries.

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What Exactly Is Facebook’s ‘Libra’ Cryptocurrency? What Are Its Challenges?

The new decade is set to launch with one of the most ambitious cryptocurrencies yet, with the social media giant Facebook’s ‘Libra’ expected to start trading in a few months. The new coin certainly has the muscle behind it: in fact, it has an entire Libra ‘Association’ that consists of companies such as Spotify, Farfetch, Uber, Lyft, PayU (Naspers’ fintech arm), and Calibra. Along with a plethora of other venture capital firms spanning the blockchain and telecommunication networks, and some non-profit organisations.

The ‘vision’ of Libra is put in no uncertain terms on its official website. That is to create: a stable global cryptocurrency built on a secure network… enabling a more inclusive global financial system.

Libra’s Ambitions, and How It Will Work

What Facebook and the other giants hope to achieve is to connect everyone in possession of a mobile phone to the global financial infrastructure. These are what Facebook considers the ‘unbanked’, those who do not have access to a bank, but who do have a mobile phone.

Libra would give these unbanked masses the ability to transfer money across the world instantly, on a secure network and at a low cost. If implemented, Libra would be an example of ‘leapfrogging’ technology, in which developing societies bypass what traditionally would have been a necessary technological evolution (i.e. the establishment of more banks) in order to get to an end point.

Libra’s Security Other and Concerns

Current proposals put Libra on a blockchain that encompasses around 100 computer servers, at least that’s the ambition. The blockchain algorithms will be programmed to work as what’s known as a “command-line programme”, something that will make scripting and interactive usage possible; with an interface of consistent options and file formats. For further security, Libra is also thought to be using Byzantine fault-tolerant consensus approach. This means that, in theory, the wider blockchain cannot be compromised even if one of the servers is disrupted.

But not everyone has faith in the new cryptocurrency, even with all the financial backing it has. Again, in theory, it should be almost impossible for a cyberattack to disrupt Libra’s blockchain, as a third of its 100 servers would have to be disrupted before such an attack could even be launched.

The Libra Association has also stressed that each of its members will have their own server, and that it will be supported independently by them and secured. Furthermore, the blockchain will have its own consensus-based algorithm. Meaning that transactions must be approved by two-thirds of all the servers before going ahead. This should make transactions more measurable and efficiently processed. Facebook has even said that Libra would be capable of processing a thousand payments per second, which would make it about 500 times more efficient than Bitcoin is today.

Libra and the Issue of Regulation

Despite the proposed ambitiousness of Libra, the United States and European Union regulatory bodies are yet to be won over. They already do not like the strength of pre-existing cryptocurrencies. Some countries have even outright banned them.

To get round this problem, the Libra Association has marketed its currency as one that has been specially designed to be friendly to regulators from the get-go. They insist, for example, that Libra is a stablecoin. If true, then this should alleviate some national fears for its potential implications on monetary policies. Still, there are concerns that if the Libra is very popular, it could become “Too Big To Fail”, which of course is a phrase still haunted by the 2007-08 economic crises.

The reason for these TBTF anxieties lies in the fact that Libra is intended to be collateralised by other currencies and some debt obligations. If there was ever a run on Libra, it would lack a centralised bank to mitigate the damage.

Libra’s special status means it will be a global currency and not specific to any one nation. So it is only natural that some national governments have expressed concerns about how it will impact on their unilateral monetary policies. Libra’s global status assures that it will fluctuate differently to any one other currency, meaning it will be shaped by its underlying assets, and may even resemble something like an index in volatility.

One way to address these fears may be found in a report conducted by the Association of German Banks. The AGB has suggested restricting Libra for payment transfers only, and not giving it the ability to provide loans. this would prevent the cryptocurrency from becoming a money creation system in its own right.

Libra — Will It Be Safe to Invest In?

Cryptocurrencies have enjoyed successful investment status and investment is predicted to keep increasing until 2020 at a minimum. Blockchain investments in the Libra cryptocurrency should be considered as a hedge in a diverse portfolio to protect against falls in other types of investments. Of course, at the moment Libra is not an asset that can be invested in… yet. But once it comes online, there’s no reason it won’t enjoy the success of others (not including the decline of Bitcoin, which may be in response to more competition from other cryptocurrencies).

Once online, Libra should be safe to invest on optimised cryptocurrency trading platforms that can handle automated and manual trading.

Libra and the Future Market

iven other fears including loss of tax revenues and transaction fees, traditional banks have already acknowledged that change is coming. In its ‘Future of Finance’ report, the Bank of England has already said that “hard infrastructure” needs to make room for, and can work with, “soft infrastructure” (cryptocurrencies). But what needs to be in place is a “well-respected” judicial and legal system, along with clear regulations, standards and rules.

As for the Libra cryptocurrency, no one can doubt the ambition of such a project. But whether it is something that the market actually needs is still a question that no one as of yet has an answer for.

Featured image by Tim Bennett on Unsplash.


This article was written by Neil Wright of Oakmount Partners Ltd, an investment consultancy firm based in Essex, UK.