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Israeli Central Bank Official Embraces CBDC Competition with Banks for Economic Growth

Israeli central bank official, Andrew Abir, sees the introduction of the digital shekel as a catalyst for technological advancements that will drive competition in the banking sector. He acknowledges the ongoing efforts to increase competition in the Israeli banking industry and states that there is still a long way to go. Abir notes that public sentiment towards commercial banks in Israel is not always favorable, and part of the discontent stems from the need to improve competition in certain segments of the industry.

The digital shekel, currently in the planning stages, is designed to include an option for paying interest. Abir assures the public that the digital shekel will be developed by the Bank of Israel, a trusted institution that stands behind the traditional cash system. He emphasizes that the digital shekel will not be created by an anonymous entity like Satoshi Nakamoto, the pseudonymous creator of Bitcoin, but rather by a transparent and accountable central bank.

Abir highlights the advantages of introducing a digital shekel for the Bank of Israel as well. It would provide the central bank with greater accessibility to central bank money, facilitating its use in digital payments. This would counteract the declining trend in central bank money usage resulting from advancements in the private sector. Additionally, the digital shekel could incentivize commercial banks to offer higher interest rates to customers, as the option to hold digital shekels would increase competition.

The digital shekel has garnered strong support among the Israeli public, indicating a positive reception for the potential benefits it offers. The introduction of a CBDC like the digital shekel is seen as a step towards enhancing competition in the financial system, driving innovation, and ultimately benefiting the Israeli economy.

As the Bank of Israel continues to develop the digital shekel, it aims to create a trusted and efficient digital currency that aligns with the country’s financial goals. With the support of central bank officials like Andrew Abir, the digital shekel has the potential to revolutionize the Israeli banking industry and pave the way for a more competitive and technologically advanced financial system.

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Canada’s Central Bank Considers Launching a Digital Currency to Combat the “Direct Threat” of Cryptos

Canada’s Central Bank, the Bank of Canada, is considering launching a digital currency that would enable the collection of data on how Canadians spend their money.

The two-year research findings

The Bank of Canada prepared a presentation for Stephen Poloz, the Governor, and the bank’s board of directors. During the internal presentation, members of the bank provided detailed public insight into the bank’s plans on a proprietary digital currency.

The presentation, “Central Bank Money: The Next Generation,” was prepared by Stephen Murchison, Poloz’s advisor, and was assigned to lead the bank’s digital currency research. The two-year research project on digital money was to determine whether the bank should issue its own digital currency.

Presented by Murchison, the research concluded that launching a central bank-issued digital currency would offer “all the benefits” of a central bank-backed asset, and also “all the convenience and security of wireless, electronic payments.” Listing over a dozen benefits, including “an additional payment method could make the payment system more robust,” the only limitation is that a digital currency “also presents a risk to stable, low-cost funding for (banks) (deposits).”

The digital currency

“We need to innovate to stay in the game,” the presentation states, while also suggesting that a digital currency could come with the option to pay interest on balances. The ability to collect more information on how Canadians spend money will also be made more convenient, while the presentation also highlights that “personal details not shared with the payee, but could be shared with police or tax authorities.”

The two deployment options for the digital currency are either token-based or account-based. As banknotes are becoming obsolete as a means of payment, while creating inefficiencies for the banking system, the presentation reads, “the time may come that merchants/banks find it too costly to accept banknotes.”

Concerns over the implications of digital money

The presentation further added that if banknotes become too costly for banks, “ordinary Canadians would lose access to central bank money.” However, the rise of cryptocurrencies will threaten the bank’s ability to carry out monetary policies and act as a lender of last resort.

Global regulators and central bankers have been concerned over the implications of digital money, since the announcement of Libra and news of China launching its own digital currency. Gathered in Washington D.C., global regulators and central bankers, including representatives from Canada, attended the annual joint World Bank/ International Monetary Fund meetings to discuss the future of finance.

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eToro CEO: Central Banks will Inevitably Establish Digital Currencies

eToro has proven to be a reckoning force in the multi-asset brokerage sector based on its popularity. It deals with crypto, free stock trading, and social trading.

The establishment of Central Bank Digital Currencies (CBDC) has gained a lot of traction in 2019. Moreover, Facebook announced its Libra Project in June, but it has become very contentious.

Yoni Assia, eToro’s CEO, recently weighed in on the issue of Central Bank Digital Currencies in an exclusive interview conducted by LearnBonds. He noted that this matter was no longer an issue of “if,” but of “how and when” because the development of digital currencies by central banks was inevitable.

He noted:

“For me, the question is when and how, not if central banks will launch digital currencies – it is inevitable. Whether they will call it crypto is the big question as it is likely to involve permission and government control, whereas crypto is permission-less and decentralized. However, the creation of digital currencies by central banks will help legitimize crypto as it will enable the conversion between them.”

Assia is of the idea that central banks will be instrumental in validating crypto usage, as well as propel mediation between virtual currencies and traditional institutions. He also highlighted that the impact of blockchain would be monumental on the worldwide financial spectrum. As a result, traditional institutions had to join blockchain’s bandwagon to be “future-proof.”

Assia stated:

“I believe that blockchain technology will facilitate the greatest transfer of wealth ever seen, not from one group of people to another, but from privately held databases to publicly available distributed ledgers.”

eToro’s CEO has shown optimistism about the future of blockchain and digital currencies.

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China’s Central Bank Rolling Out DCEP National Currency, While Saying ‘Libra Won’t Succeed'

China has been reportedly developing its central bank-issued digital currency for a while and is believed to be ready to launch by China’s central bank, People’s Bank of China (PBoC).

Huang Qifan, the Vice Chairman of the China International Economic Exchange Center (CIEE), stated that the PBoC has continued to be committed to becoming the first country in the world to come out with a national digital currency.

Huang confidently emphasized that the digital currency electronic payments system (DCEP) will be ready to be introduced to the financial system soon:

“The significance of Digital Currency Electronic Payment lies in that it’s not the digitization of existing currency, but the replacement of Reserve Money (M0). It greatly reduces the dependence of the trading process on accounts, which is conducive to the circulation and internationalization of the Renminbi.”

Upon review of the 50 patent applications submitted by the PBoC, the DCEP will be powered by a two-tier operating system and would not be running on blockchain.

However, the PBoC also announced that Chinese commercial banks should be embracing blockchain and digital finance earlier this week, adding on President Xi Jinping’s speech on Oct. 24 urging the nation’s acceleration of development of blockchain technology.

Huang also expressed that Facebook’s Libra stablecoin and Bitcoin should not be trusted as they are not government-issued and are vulnerable to instability.

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Central Bank Digital Currencies Unmasked by Dr. Alicia Garcia-Herrero at Natixis

Central bank digital currencies (CBDCs) have increasingly sparked interest in recent years. With the notion of China’s central bank, People’s Bank of China (PBoC) announcing its plan to issue its digital currency (DCEP) and Facebook’s Libra stablecoin emergence, the world has been paying more attention to CBDCs.

Alicia Garcia-Herrero, Asia Pacific Chief Economist at Natixis shared her insights into CBDCs at an event in Hong Kong in September this year. Garcia-Herrero also serves as a Senior Fellow at European think-tank Bruegel and is an advisor to the Hong Kong Monetary Authority’s research arm (HKIMR) and the Asian Development Bank. In addition, Garcia-Herrero has been very active in international media and she has been nominated TOP Voices in Economy and Finance by Linkedin for her leadership thoughts.

Blockchain.News has been delighted to reach out to Garcia-Herrero for her to share some thoughts on central bank digital currencies around the world.

Why are central bank digital currencies considered as an autonomous factor for monetary policy implementations?

As autonomous factors are items which are not controlled by the monetary policy function of the central bank, CBDCs could compete with bank deposits and draw liquidity away from the banking system depending on how CBDCs are regulated by central banks and, in particular, whether CBDC holdings at the central bank are remunerated positively. This could raise the funding rates of banks, reducing their margins.

Do you agree that the issuance of CBDCs can strengthen the pass-through of the policy rates to the money market and deposit rates? What are the crucial design features of CBDC to enhance the pass-through?

Some CDBCs, especially those used at the retail level, allow central banks to have direct monetary interaction with the public, which reduces the role of banks in intermediation. One could even think of a perfect pass-through but, on the other hand, there is no real intermediation as those funds cannot be lent on to borrowers. It would be some kind of narrow banking.

Furthermore, given that central banks set the CBDC interest rate (the CBDC interest rate could become the policy instrument) and that CBDCs could be used by the general public for daily transactions, the policy rate transmission will be better on paper but hard to think how such funds will be intermediated.

In terms of design features most research seems to have focused on creating design features to avoid a CBDC run (out of bank deposits and into CBDCs), such as enforcing daily limits on the number of bank deposits that can be converted into CBDCs.

How does the interest-bearing characteristic of CBDCs affect the effectiveness of the monetary policy? Do you think interest-bearing CBDCs can serve as an effective lower bound of interest rates and thus facilitating central banks to control market interest rates?

CBDC, being a central bank’s liability, can be interest-bearing or not (or even negative if needed) as opposed to cash. If set negatively, it basically can allow a central bank to bypass the zero-bound. In order to assess the impact of CBDC on the term structure of interest rates, what are the factors to consider?

A CBDC (especially a positive interest-bearing CBDC) has the potential to eliminate cash. Gradually as cash gets converted into electronic money, it is likely to get invested in capital market instruments. This could have a downward impact on interest rates. The proportion of cash which is today maintained by households for day to day transactions may get invested in short term interest rate instruments that are easy to liquidate. As a result, short term interest rates may fall more than long term interest rates.

Some academics suggested that CBDCs can enhance financial stability, similar to the concept of “narrow banking.” Do you agree? What are the main differences between narrow banking and CBDCs?

Under narrow banking, a deposit-taking institution may invest its deposits only in safe (risk-free) and liquid assets like government bonds. Given that deposits are invested in risk-free assets, deposit insurance is not required, and banks need not be bailed out.

Lending to corporations and to the general economy is left to other institutions (non-deposit taking finance companies) that raise funds through the wholesale market.

Like narrow banking, the risk of credit default (and the need to insure deposits) is reduced significantly with CBDCs as the liability shifts from risk-taking commercial banks to risk-free central banks.

The disadvantage of narrow banking is that there is no intermediation so the cost of risky lending will increase enormously, hampering growth.

What are the possible impacts of CBDC on seigniorage?

Seignorage, the profit made by a government by issuing currency, will depend on the interest rate paid on the CBDC and the relative cost of producing CBDC versus the costs of producing the equivalent amount of cash.

China’s Central Bank Digital Currency Research Unit Signs Deal with Huawei

The Chinese central bank, People’s Bank of China’s (PBoC) Digital Currency Research Institute, has signed an agreement with multinational telecommunications giant Huawei.

Fan Yifei, the PBoC deputy governor signed the fintech research cooperation agreement between Huawei and PBoC’s Digital Currency Research Institute in Shenzhen at Huawei’s headquarters.

Huawei said that the “strategic cooperation” agreement is for FinTech research. Fan also praised the firm’s achievement in developing distributed databases and computing chips.

Ren Zhengfei, Huawei’s CEO recently publicly stated its support for China on the issuance of a digital currency to rival Facebook’s stablecoin Libra. He said: “China can also issue such currency by itself. Why wait for others to issue it?

The PBoC started its Digital Currency Research Institute in January 2017, focusing on blockchain and FinTech research. Mu Changchun, appointed to head the research said that the design of the national digital currency would be similar to Libra and would be accessible across major payment platforms including WeChat and Alipay.

Huawei has been active in the blockchain space, having revealed its Hyperledger blockchain offering in April of this year. This announcement also appears to be the first publicly announced deal by China’s central bank with a well-known company.

President Xi Jinping also called on his country to accelerate the adoption of blockchain technology recently.

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Dr. Alicia Garcia-Herrero's Take on China’s CBDC and Facebook’s Libra

In Part 1 of our interview with Alicia Garcia-Herrero of Natixis, we took a deep dive into the impact of central bank digital currencies (CBDC) regarding monetary policy and financial stability. In Part 2 of the interview, Garcia-Herrero explained the disruption of China’s CBDC – digital currency electronic payment (DCEP) on China’s monetary system. She also commented on the basket of currencies that Facebook’s Libra supports and Libra’s potential threat to monetary sovereignty.

How will China’s CBDC disrupt the existing monetary system in the nation? Do you think the Chinese CBDC will completely replace the renminbi (RMB) in 5 – 10 years? 

The PBoC’s issuance of a CBDC could be more or less disruptive, depending on the model that the PBoC finally chooses for its digital currency. In particular, a wholesale model will be less disruptive for existing digital payments. In addition, a centralized model (rather than a blockchain-based decentralized one) will also be less disruptive in terms of the degree of anonymity of transactions. Such centralization allows for traceability of CBDC transactions. 

If the Chinese CBDC is launched, how will you predict the responding action by the Federal Reserve of the United States? Do you think the Federal Reserve will issue its CBDC? 

Philadelphia Federal Reserve Bank President Patrick Harker recently stated that it is “inevitable” that central banks including the US Federal Reserve will start issuing digital currency. However, he cautions that the United States should not be the nation to lead such a move. 

The issuance of a CBDC by the PBoC may push the FED to act more quickly if such E-RMB moves cross border very quickly, substituting USD banknotes in circulation. 

Facebook announced that Libra supports the following basket of currencies: USD (50%), EUR (18%), JPY (14%), GBP (11%) and SGD (7%), yet RMB is excluded. What do you think about the currency selection? Do you think the weight of different currencies is appropriate for Libra? 

China’s reluctance to promote Facebook (within China) and potentially bar Libra could be reasons behind the RMB’s exclusion from the Libra basket. The Libra Association might be foreseeing some technical/regulatory hurdles in including the RMB. In his congress testimony, David Marcus had a similar response to a question asked on the exclusion of Chinese companies within the Libra Association.   

Countries like France, Germany and the US believe Facebook’s Libra can threaten their “monetary sovereignty,” although David Marcus of Libra disagreed. What do you think? 

David Marcus claims that with Libra there is no new money creation and I fully agree. Libra is just a basket of currencies.  

Cryptocurrencies represent a new money issuance standard based on blockchain, which has the potential of fulfilling Friedrich Hayek’s vision on the “Denationalization of Money.” With the emergence of CBDC, do you think the denationalization of money is more likely a dream instead of reality? 

Even though the technology enables CBDCs to be used beyond national boundaries, there is likely to be political resistance to making any single CBDC a global currency. For instance, a national central bank may lose control over its domestic inflation, if a significant value of domestic goods were denominated in foreign CBDCs. In reality, host central banks can actually use their regulatory power to stop the use of an E-RMB by not accepting payments in such currency. However, China’s economic power might be so high in some countries that they might not have a choice other than accept E-RMB for legal tender (or at least as far as Chinese nationals are concerned, either individuals or companies). 

What are the impacts of CBDC on the IMF Special Drawing Rights basket? 

The impacts are not significant, as the technology behind CBDCs should make processing faster, which will enhance foreign trade. Countries with a CBDC may be in a position to increase their trade with other countries, just because they could process their trade transactions faster. With greater trade representation, their weightage in the Special Drawing Rights may increase. 

China’s Central Bank’s DCEP is Trying to Make WeChat Pay and Alipay Redundant

Mu Changchun, the Director-General of the Institute of Digital Currency of China’s central bank, People’s Bank of China, spoke at one of the panels at the Singapore Fintech Festival held at the Singapore Expo on Nov. 12 regarding the future of digital currencies.

Mu made a comment regarding China’s central bank digital currency (CBDC), also known as the digital currency electronic payment (DCEP), saying that they are “trying to provide redundancy to our very advanced electronic payments” including WeChat Pay and Alipay.

The reason behind the comment was due to the potential risks the central bank foresees if there would be any technical difficulties with these electronic payment entities, there would be detrimental harm to the financial ecosystem. Mu added that this move was to “prepare for anything bad to happen,” given that 96% of China’s population is using electronic payment systems.

Mu briefly introduced the two-tiered system that the CBDC will be running on and noted that commercial banks will be in the loop. He also highlighted that the CBDC is targeting cross-border payments and the M0 – which refers to the Chinese Yuan fiat in circulation.

He lastly mentioned that China will be keeping the monetary policies and implementations untouched, as well as the financial system. The CBDC is a hybrid of an account-based system and a value-based system. He concluded, “we are not aiming to be a cashless-society, but rather a cash-light society.”

Crypto Leaders Discuss Libra, China's CBDC and a Cashless Future at the Singapore Fintech Festival

The Singapore Fintech Festival gathered even more blockchain professionals on Day 2 of the event, kicking off with representatives of tech giants including Intel, Microsoft, and Nasdaq sharing insights on navigating the impending economic slowdown and global uncertainty regarding the global access to data.

A noteworthy panel followed on the topic of “defining the future of digital currency,” joined by Christian Catalini, co-creator of Libra and Head Economist of Calibra, Mu Changchun, Director-General of the Digital Currency Institute of the People’s Bank of China, HE Serey Chea, from the National Bank of Cambodia and Umar Farooq, Head of Blockchain at J.P. Morgan Chase & Co.

Catalini explained that in the current economic tensions, although tech has been around for 30 years, 1.7 billion people are still unbanked. He mentioned that some of the average charges for sending a remittance are around 7%; by using blockchain technology, a lot of issues can be solved for real people.

Mu further explained China’s development of its central bank digital currency (CBDC) and claimed that one of its goals is for financial inclusion for the people who live in the remote and rural areas in China. He stated that China is “not aiming to keep information on the general public,” but rather to create a cash-light society while “preparing for anything bad happening” in the financial ecosystem.

Chea introduced the Bakong Project by Cambodia’s national bank, while highlighting that mobile phone penetration has been huge in Cambodia, with subscriptions over 20 million in the country – the biggest challenge they are currently working on is bringing the mobile payments and the traditional banks together. Having explored with Hyperledger, the central banks could issue a wallet to everyone to use and download, while the banks and payments services could get access to tokenized fiat, and then issue it to the end-users. Consumers can then withdraw digitized fiat to their own wallets.

Mauritius Jumps on Digital Currency Bandwagon

The issuance of Central Bank Digital Currency (CBDC) has been making airwaves with major players such as the U.S. and China, leading the race.

The Bank of Mauritius appears to be jumping on this bandwagon based on an announcement that it wants to introduce a digital currency.

Its governor Yandraduth Googoolye acknowledged that the institution had begun engaging with various international institutions about the provision of a digital currency to be used for retail payments.

The Mauritian Government’s Blockchain and FinTech Commitment

Suyash Sumaroo, the co-founder of Horizon Africa, a Mauritius-based blockchain startup, noted: “Personally, I think that during the last 2-3 years, there has been a lot of focus on FinTech and blockchain technology from the Mauritian government and the private sector.”

He added: “I believe that there will be more large-scale projects of this nature which will help the country and region develop.”

As per the Bank of International Settlement (BIS) definition, CBDCs act as new variants of a central bank’s liability denominated in an existing unit of account. As a result, they act both as a store of value and medium of storage.

Moreover, CBDCs are founded on four main properties of money, namely accessibility, form, technology, and issuer.

Mauritius has been witnessing a myriad of activities in the blockchain and FinTech fields due to considerable government support.

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