![]() Meanwhile, central banks face the challenge of introducing a timely CBDC model at least on par with digital offerings of private-sector innovators in order to establish credibility with such efforts and achieve adoption. Implementing such functionality will be a complex and multilayered undertaking. Beyond addressing the challenge of greater financial inclusion, some governments view CBDCs as programmable money-vehicles for monetary and social policy that could restrict their use to basic necessities, specific locations, or defined periods of time. Various public statements indicate that central banks envision CBDCs as more than simply a digital-native version of traditional notes and coins. Collectively, nearly $3 trillion in stablecoins such as Tether and USDC were transacted in the first half of 2021 (Exhibit 1). Stablecoins aim to address these shortcomings by pegging their value to a unit of underlying asset, often issued on faster blockchains, and backing the coins wholly or partially with state-issued tender (such as the dollar, pound, or euro), highly liquid reserves (like government treasuries), or commodities such as precious metals. ![]() Thousands of similar decentralized cryptocurrencies now exist, collectively generating billions of dollars in global transaction volume every day.Īlthough the aggregate market value of such cryptocurrencies now exceeds $2 trillion, extreme price volatility, strong price correlation to Bitcoin, and often slow transaction confirmation times have impeded their utility as a practical means of value exchange. The emergence of Bitcoin in 2009 dramatically altered this model in two important ways: by establishing a decentralized (blockchain-based) ledger for transaction execution and record keeping, and by creating a (now) widely traded currency outside the control of any sovereign monetary authority. ![]() Early efforts at creating digital cash-such as DigiCash (1989) and e-gold (1996)-were issued by central agencies. The basic notion of a digital currency (replacing the need for paper notes and coins as a means of exchange with computer-based money-like assets) dates back more than a quarter of a century. Against this backdrop we offer a fact-based primer on the universe of collateralized cryptocurrency, an overview of several possible future scenarios including potential benefits and obstacles, and near-term actions that participants in today’s financial ecosystem may consider in order to position themselves. Concurrently, multiple private, stabilized cryptocurrencies-commonly known as stablecoins-have emerged outside of statesponsored channels, as part of efforts designed to enhance liquidity and simplify settlement across the growing crypto ecosystem.Īlthough the endgame of this extensive activity that spans agile fintechs, deep-pocketed incumbents, and (mostly government-appointed) central banks remains far from certain, the potential for significant disruption of established financial processes is clear. 2 Codruta Boar and Andreas Wehrli, Ready, steady, go? Results of the third BIS survey on central bank digital currency, Bank for International Settlements, BIS Papers, number 114, January 2021, bis.org. More than four-fifths of the world’s central banks are similarly engaged in pilots or other central bank digital currency (CBDC) activities. 1 “Eurosystem launches digital euro project,” press release, European Central Bank, July 2021,. The European Central Bank announced recently it was progressing its ‘digital euro’ project into a more detailed investigation phase. That disconnect is now evolving rapidly with both monetary authorities and private institutions issuing stabilized cryptocurrencies as viable, mainstream payments vehicles. To date, however, its high profile has derived more from its status as a potential store of value than as a means of financial exchange. ![]() Cryptocurrency has been touted for its potential to usher in a new era of financial inclusion and simplified financial services infrastructure globally.
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