March 28, 2024

National cryptocurrency – government digital currencies

National Cryptocurrency - State Digital Currencies

In April 2020, China launched a pilot project for a national digital currency. After that the Europeanthe central bank convened a working group, which included representatives of major economies in the world. Together, they coordinated research and development in the field of digital currencies.

Being inspired by opportunityto modernize domestic payment systems or play a leading role in updating the global payment infrastructure that supports cross-border trade and money transfers, countries around the world began to study the benefits and risks of issuing digital currency. Despite the fact that many of them are in the early stages of research, central banks, representing one fifth of the world's population, say that in the near future they can issue digital currency.

The initiative program of economic diplomacyThe Belfer Center, in collaboration with the Atlantic Council's Global Business and Economics Program, tracks the latest developments in the digital currencies of central banks.

What is a central bank digital currency?

Central Bank Digital Currency (CBDC) ornational cryptocurrency is simply the digital form of a country's fiat currency. Instead of printing paper banknotes and minting coins, the central bank issues electronic tokens, the value of which is ensured by all state revenues and borrowings.

Deposits held today in commercialbanks are already digital and can be moved electronically using credit and debit cards, as well as mobile payment applications. However, this form of digital money is a liability of private banks that must maintain reserves and deposits. CBDCs are the responsibility of the government (like cash), which means that they will be supported by the central bank.

How is the digital currency of the Central Bank different from bitcoin?

Digital currencies may also be issued in privateinstitutions. They can be centralized, that is, published and regulated by one authority (but not the government) such as Libra from Facebook. They can also be decentralized like Bitcoin. Today, about 3,000 private digital currencies have a total market value of more than $ 250 billion. Of these, the three largest are Bitcoin (market capitalization - $ 173 billion), Ethereum ($ 25 billion) and Tether ($ 9 billion).

Decentralized digital currencies such asBitcoin is often called cryptocurrencies due to their underlying technology. As a rule, they use distributed registries, where many devices keep independent records of transactions and use consensus models to decide which record is correct. Cryptocurrencies use a number of algorithms and cryptographic methods to ensure their security.

Why does a country need a national digital currency?

Central banks, in fact, are just startingexploring options for using national digital currencies. According to the IMF, the key reason for advanced economies to consider introducing this form of currency is to discourage the growth of private forms of digital money. In fact, if users need the convenience and low cost of digital payments, governments may wonder, “If not us, then who?”

Due to the fact that the economies of such statesbecome more and more non-cash, and applications like Venmo, WeChat and M-Pesa only contribute to an increase in payments, this increases the relevance of consumer protection, data privacy and operational risks. Recent initiatives, such as the Libra currency from Facebook, could further encourage politicians to seek appropriate solutions before users adopt an alternative over which the government will have limited control.

A recent digital currency pilot in China has also contributedan element of competition between the great powers, because proactive technology leadership can enable China to dictate the development of a global payment infrastructure that fosters cross-border trade and remittances.

Meanwhile, economists argue that digitalCentral bank currencies can improve market performance. The Bank for International Settlements (BIS) said that they can improve liquidity by increasing the speed of transactions, while the Bank of England noted that digital money can increase GDP by 3% by reducing transaction costs.

In many emerging economiesIn economics, national cryptocurrencies are primarily seen as a means of expanding financial services coverage, allowing governments to include people in the digital economy who do not have access to banking services.

What are the risks?

A lot of them. National digital currencies can give governments the ability to supervise users - this is good for tracking down criminals, but bad in terms of interfering with the privacy of ordinary citizens.

There may be consequences for financialstability: for example, business models for banks and payment platforms will have to change if people use digital money provided by the state.

In addition, central banks needsignificantly expand its operational capabilities for managing digital currency, from managing reserves and deposits to protecting user privacy, preventing falsification of digital data, mitigating cyber attacks and other operational risks.

What are the geopolitical implications?

When bitcoin first appeared on stage, itthe novelty was that no one was responsible for it thanks to a complex system of distributed registries, consensus protocols and cryptography. The currency could exist in a peer-to-peer P2P network that did not have a central administrator.

The most promising projects in the field of digitalCurrencies today are very different. The Chinese government will manage the digital yuan, while Facebook is at the helm of its Libra. The widespread introduction of these or similar projects in the field of digital currency would provide much more power to currency operators and less to the US government.

Moreover, today most of the globalPayment infrastructure, such as messaging, clearing and settlement, is administered by the US authorities. If alternative systems were developed to support these digital currencies, the United States could lose its ability to control and regulate payment flows.

Here are some examples of national security implications:

  • Sanctions. Some experts expect the US dollarwill lose its dominant status, as competing global currencies and payment infrastructure can reduce the impact of US policy. Their economic sanctions will become irrelevant, as the affected parties can simply switch to another currency.
  • Illegal actions. Most digital currency transactions are unlikelywhether they are anonymous, however, the US authorities will have to coordinate with the Chinese government, Facebook officials or other foreign exchange operators to collect information about illegal transactions.
  • Data privacy. Digital currencies will eventually generatea lot of data on how people spend their money, which raises concerns about the possibility of surveillance, data manipulation and other privacy violations.
  • Data security. Digital currencies face vulnerability insecurity, like any other technology. Cyber ​​attacks and security breaches can lead to the theft of currency and personal data, and even to a temporary cessation of economic activity.

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