Central banks around the world are beginning to change their attitude towards Bitcoin

Author: GTong

The rise of Bitcoin has led central bankers around the world to study the possibility of issuing virtual currencies, which would be backed by their governments.

This shift in direction would not only reduce costs across the payments system and give authorities more control over their money supply, but it also raises security and privacy issues.

So far, no central bank has been willing to issue a digitized version of their fiat currency. But as the promise of virtual currencies grows, officials around the world are beginning to see the development of digital payment systems as a foregone conclusion.

“In the world we imagine where people mostly use electronic money, we need to anticipate and manage the risks and benefits that might arise,” Carolyn Wilkins, senior deputy governor of the Bank of Canada, said in a speech on Nov. 13.

Central banks have so far failed to solve a technology that would allow them to issue their own digital cash, but a Dublin-based startup that has been talking to several central banks is promoting a technology it claims could help them solve that problem.

Jonathan Dharmapalan, founder and CEO of ECM, said the company has discussed technology with 30 central banks, conducted pilots in multiple countries, and has signed agreements with two central banks to provide the technology necessary to issue currency. He declined to name the central bank or country, but said he hopes they will be available soon.

He said that unlike Bitcoin, their company's technology does not exclude the existing payment system. Instead, it can make transactions flow between consumers, merchants, banks and payment companies like cash through existing or new electronic transaction systems. In other words, it will change the composition of currency, but not the "channel" of currency circulation.

In recent years, Canada and Ecuador have experimented with their own digital payment technologies, and the topic has become a research agenda for central banks around the world. The Bank for International Settlements, which has 60 central bank members from around the world, said in a document released last month that existing digital currencies, such as Bitcoin, raise the possibility that governments will have less control over their monetary systems, with one sentence saying: "One option is to consider using technology to issue digital currencies."

Federal Reserve officials have said they are monitoring developments but have stopped short of saying they are considering issuing a digital currency.

Central banks’ interest in digital currencies is a natural response to the sudden shift away from cash, which is an electronic payment system where money is stored in bank accounts and needs to be verified through the payment system’s network, which adds costs.

Digital currency, on the other hand, is a bit like an encrypted computer code "minted" by a central bank that will contain all the necessary information to verify its value. This means it can be moved around with users and merchants in some way.

For example, today a consumer might have a debit card or gift card issued by a bank or retailer with a value of $10. That $10 can only be spent in places that accept that card. But if that card is issued by the Federal Reserve, then the owner of that $10 could theoretically spend it anywhere.

The prospect has a host of advantages that appeal to central banks. One very practical advantage is that they can save money on printing cash. Mr Dharmapalan says it would cost only 10% of the equivalent of physical currency to produce and distribute digital money, while governments would also receive a revenue from the issuance of the currency, known as seigniorage.

Central banks may also find that another advantage of electronic money is the ability to better track transactions, as cash transactions are anonymous and can be easily used for illegal transactions.

In a press release last Wednesday, Omidyar Network, a philanthropic investment firm backed by Ebay founder Pierre Omidyar, said it had invested in eCM. Neither Omidyar Network nor the investment firm have previously disclosed information about their digital currency projects to any media outlet, nor have they disclosed the amount of money eCM has raised since its founding in 2011.

Felix Martin, an investment fund manager and author of the book Money: The Unauthorized Biography, said he had not conducted a detailed analysis of the technology behind eCM, but in theory the innovation “could be a very useful advancement, most likely in the evolution of physical cash”, enabling non-bank businesses to interact digitally with central banks.

Kennedy Komba, a global financial policy maker who now works at the central bank of Tanzania, said he has seen eCM and believes that digital cash backed by a central bank has great potential.

Mr. Komba said that in Africa, for example, mobile payments are growing rapidly, but money is still strictly controlled by the government. If a mobile user in Tanzania wants to deposit money into her account, he or she must deposit cash. If the consumer wants to pay another person who does not have a mobile payment system, then he or she has to withdraw cash.

To facilitate all that cash movement, central banks, commercial banks, and telephone companies have to spend money on staff, vaults, and secure transportation. But digital currencies could make transactions simpler and more convenient, while also lowering the cost of financial services.

In some developed countries, such as the United States, digital cash is also beneficial to consumers because it makes transferring money easier and cheaper in the digital realm.

Some economists, such as Andrew Haldane, chief economist at the Bank of Scotland, say the widespread use of digital cash could create new possibilities in interest rate policy as existing monetary policy tools have reached their limits in promoting global economic recovery.

Policymakers have generally avoided negative interest rates, in part because consumers would withdraw cash from banks if they felt the interest they paid on deposits would reduce the value of their accounts. Without physical cash, account holders would not have that option.

“Perhaps central bank money has matured because the technology itself has developed so much,” Mr Haldane said in a speech on September 18.

JPM compiled from

Wall Street Journal, Central Bankers Explore Response to Bitcoin: Their Own Digital Cash, by Ryan Tracy.