With China leading the way with its own digital currency, is this going to be the next revolutionary thing in the payments industry?
What’s New?
In a speech to a conference on innovation sponsored by the U.S. Fed’s San Francisco regional bank, Fed Governor Lael Brainard, said that the Federal Reserve is building and testing a hypothetical digital currency.
He was quoted by MarketWatch saying, “We are taking the time and effort to understand the significant implications of digital currencies and central-bank-digital-currencies around the globe.” He also said that the Fed will remain committed to make sure the public has access to a range of payment options.
You might wonder whether the Fed is planning to create the next Bitcoin, then we have to tell you that digital currencies slightly differ from cryptocurrencies.
Digital Currencies & Cryptocurrencies
Digital Currencies: According to the European Central Bank, digital currency is the digital representation of the cash recorded electronically into debit or credit cards. These are fully centralised and surrounded by legal frameworks. The transaction directories of digital currencies are kept secret and these currencies are not encrypted.
Cryptocurrencies: Cryptocurrencies are based on the blockchain technology and everything that happens in its network cannot be controlled by regulators. Hence, cryptocurrencies are completely decentralised. The transaction directories are visible to all and these currencies are highly encrypted.
Please Note: Cryptocurrencies are actually digital currencies because both cryptocurrencies and digital currencies exist only in the internet. However, to help you understand the basic differences between both of them, we have given the above definition.
The Global Phenomenon
The Fed isn’t the first Central Bank to experiment with digital currencies. In his speech, Brainard also said that China has moved ahead rapidly on its version of a central-bank-digital currency. On 14th August 2020, Wall Street Journal reported that China’s Ministry of Commerce said that the digital currency — dubbed DC/EP for digital currency/electric payment — would be trialed in major cities across the most developed regions. The ministry reportedly stated that the project design is anticipated to be concluded by the end of 2020.
This currency is already being put through its paces in regions like Shenzhen, Suzhou, Chengdu and Xiong’an. It will soon be launched in regions, including Hebei province, the Yangtze river delta, Guangdong province and the cities of Beijing, Tianjin, Hong Kong and Macau.
Coindesk reported that many companies owned by Tencent are said to be working with the research wing of the People’s Bank of China on testing the digital yuan. These firms include food retailer Meituan-Dianping, video-streaming platform Bilibili and ride-hailing startup Didi Chuxing.
In July, the Banque de France, the Central Bank of France, shortlisted eight companies to experiment with digital currency creation. These firms are Accenture, Euroclear, HSBC, Iznes, LiquidShare, ProsperUS, Seba Bank and Societe Generale — Forge. The Bank said that the lessons learned from these experiments will be a direct contribution to the more global reflection conducted by the Eurosystem on the value of a CBDC (Central Bank Digital Currencies).
In July, Coindesk reported that the Bank of Japan has said that it will begin experimenting with a CBDC to examine its feasibility from a technical perspective. In February, the Nikkei newspaper reported that the leaders of the Central Bank of Britain, the eurozone, Japan, Canada, Sweden and Switzerland announced a plan to collaborate on researching issuing digital currencies.
India & It’s Digital Currency
Earlier in 2020, the Draft National Blockchain strategy tabled by the National Institute for Smart Government (NISG) has called for India to develop a Central Bank Digital Rupee (CBDR) on a national permission blockchain. Even though India is currently not developing a digital currency, we feel that it will be highly beneficial for us if they do.
Because digital currencies can:
a) Widen the range of options for monetary policy
b) Make the financial system safer
c) Promote competition and innovation in the payment systems and much more
In conclusion, there is a competition to create the best digital currency and these currencies can revolutionize the payment system. Also, during this pandemic, physical cash is being used less and less these days. So, aren’t digital currencies the best mode of payment going forward?
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