Central bank digital currency and Bangladesh

Lately, the emergence of the central bank digital currency (CBDC) has received a lot of attention in the media and among the general public. Simply put, CBDC means that a central bank issues electronic money instead of physical or paper money. In the short to medium term, digital currency and paper money can coexist in an economy, but over time, digital currency has the potential to completely replace paper money. An example of CBDC is the Bangladesh Bank digital issuing taka, which we will refer to here as “e-taka”.

The recent decision by the People’s Bank of China (PBOC) to roll out the digital version of the physical yuan (“e-yuan”) prompted both the European Central Bank (ECB) and the Federal Reserve – among other central banks – to consider issuing CBDCs. In summary, China’s decision to issue e-yuan is a move to recalibrate the balance between the state and the private sector (e.g. Alipay). Old oligopoly literature argues that in a market served by a few private companies, a public or government-backed company can still threaten to enter if private companies stray too far from a common goal. For example, suppose a private company serving electricity in a jurisdiction that leaves out marginalized customers. In this case, a state-owned enterprise could come in to increase production, resulting in lower profits for the private enterprise. This potential threat from the state enterprise acts as a disciplining mechanism for private enterprises, so that they behave in predictable ways. Something similar is at play between PBOC and Alipay in China.

A CBDC is different from paper money in that CBDC holders are unlikely to earn any interest. Otherwise, people will transfer their deposits from commercial banks to an account at the central bank because the central bank is seen as a risk-free entity. This would undermine the very purpose of financial intermediation in an economy. Thus, banks will continue to do business as long as they offer interest on their deposits. The main difference between digital currency and paper money is that due to the possible lack of anonymity of the former, the central bank can track our spending. This is similar to using platforms such as bKash and Rocket, where service providers have information about each of our cash-out and cash-out transactions. Central banks have the monopoly power to issue fiat currency, and now they want to maintain some control over digital payments as well. This is one of the reasons why Nagad was created, so that the digital payment system is not 100% controlled by private companies.

A related question to consider is why central banks don’t like cryptocurrencies, despite the growing acceptance of crypto. Central banks do not want to lose the monopoly on physical money and the associated seigniorage income. Moreover, if more transactions are done with the cryptocurrency, it will undermine the monetary policy of central banks. Stephen Jen, a London-based hedge fund manager, rightly points out that CBDC is the antithesis of cryptocurrency. While a cryptocurrency is anonymous and decentralized, a CBDC lacks anonymity and is centralized.

When all the major central banks choose to use the CBDC, imagine what could happen. Many people keep foreign currency with them for business and travel purposes. The amount and denomination of foreign currencies held by us will be known to the issuers of the CBDCs. Also, at present, we are not directly taxed for holding US dollars on us. Where there is a digital version of the US dollar (“e-USD”), a certain tax may be levied on dollar holdings. Therefore, as the US Treasury and G20 countries are now calling for a global minimum tax for businesses, a similar decision could come from the Fed and other G20 central banks for a similar tax on CBDCs, in especially for vehicle currencies. However, it is likely that these taxes will first be levied on businesses than on households. But one thing is clear, central banks will embrace digital currencies and blockchain technology will allow them to know the current and past owners of these currencies. This will undoubtedly make life difficult for money launderers, even if developed countries disproportionately benefit from illicit cross-border flows.

What do all these developments mean for Bangladesh? A digital taka (e-taka) can make the payment system faster and cheaper. Currently, it takes 30 minutes and an additional 100 taka to transfer 1 taka lake through the real-time gross settlement service, since the trade request is placed between 10 a.m. and 3 p.m. In Europe, it only takes 10 seconds to process a payment at a cost of € 0.002 per transaction (equivalent to 20 paisa in Bangladesh). An e-taka will also save hundreds of taka crores needed for printing banknotes. For example, it takes 8 taka to print a 1000 taka bill and almost 2 taka to mint a 5 taka coin.

But the most important benefit to be gained from the introduction of “e-taka” is that it will allow the government to track its budget disbursements for development and other functional services. Thus, public officials who profit from theft and accumulate physical money because the government is slow to identify them (often they are identified right after retirement), will find it more difficult, if not impossible, to steal. public electronic money. . Just as the introduction of the electronic public procurement system (E-GP) has improved the quality and competitiveness of tendering for public projects, the mandatory use of e-taka in public works will make the more transparent system and fight against corruption.

In our personal lives, a digital taka can bring unexpected benefits. For example, parents will be able to track where their children spent the money, thereby reducing embezzlement. Additionally, digital currency can be programmed not to be used in certain transactions. For example, a diabetic patient may not be able to purchase unhealthy food with digital money. We can also know where our contributions to zakat and sadaqah are spent. All of these benefits come, of course, at the expense of privacy, which we appreciate very much in Bangladesh. For example, compared to many countries in the world, the Chinese are more used to being followed by their government, and this is said to be where the CBDC will be most successful in China.

To conclude, in theory, CBDCs can be extremely powerful in the sense that they can crowd out credit cards and banks. But that defeats the purpose of the system. Although the new competition from CBDCs will likely make banking services cheaper, faster and more equitable. Needless to say, whether digital currency is run by private banks or a central bank, the greater concentration of digital currency will make the system more vulnerable to cyber warfare.

China invented paper money in the 7th century and monopolized the issuance of currency in the 11th century. It is therefore not surprising that the PBOC is the first major central bank to introduce electronic money. The Fed, ECB, and other central banks will likely issue their own CBDCs in the coming years. CBDCs could act as a powerful countermeasure against cryptocurrencies and could become a dominant medium of exchange.

The author is professor of economics at East West University.

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