Can central banks become issuers for Bitcoin, Ethereum and other coins as shown on the picture for this material? Is that what we mean when speaking about central bank-issued digital currencies? A central bank-issued cryptocurrency is actually an innovative, completely different means of payment not connected with Bitcoin or altcoins familiar to the general public.

To understand how this new type of digital coins appeared, we must first look at the history of cryptocurrency in general.

Cryptocurrency started as a project by people not related to any officials, politicians or authorities. Although we still have little clues about who exactly was Satoshi Nakamoto, the anonymous creator of Bitcoin, one can suggest he was not connected with any state. The first message ever put on Bitcoin blockchain was “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” in the genesis block. Taunting the financial crisis of 2008, Nakamoto offered an alternative to the world financial system.

After the data security benefits of blockchain became apparent and the cryptocurrency market capitalization went up, some central banks started to review the idea of their own digital currency which is, unlike Bitcoin, is managed by a central authority. One of the most detailed research papers to date comes from the Bank of England. In a paper dating back to 2018, three models of central bank-issued digital currency (CBDC) are put into study:

  • Financial Institutions Access Model (Model FI)
  • Economy-Wide Access Model (EW)
  • Financial Institutions Plus CBDC-Backed Narrow Bank Access (Model FI+)

These three models each have a different answer to the question: “Who can use this hypothetical CBDC?” If we see an introduction of this coin based on Model FI or the Financial Institutional Access Model tomorrow, only banks and non-bank financial institutions (NBFIs) would be able to use it. This is drastically different to Bitcoin and other decentralized cryptocurrencies we already know. 

The second model, Economy-Wide Access (EW) adds households and companies to the list of potential users. They can buy and sell CBDC with the help of a CBDC Exchange, and banks may even integrate the exchange functions in its consumer offering to ease the engagement. Without any doubt, certifying a CBDC Exchange would prove much more difficult in comparison to most cryptocurrency exchanges (especially during the years of their advent).

And the third model considered by the Bank of England, Financial Institutions Plus CBDC-Backed Narrow Bank Access or simply Model FI+, allows yet another approach. Just like in the previous model, households and firms can exchange bank deposits to digital currency funds but this time, the access is more strict and it’s provided by indirect CBDC providers (iCBDCPs). To become an iCBDCP (wow, that’s a mouthful!), you would have to own a bank or a non-bank financial organization. In the words of researchers, “financial institutions providing iCBDC can be thought of as a type of narrow bank.”

Even despite the support towards the concept of CBDC voiced by Mark Carney, Bank of England governor, in the same year the aforedescribed study was published, we still don’t see an actual practical implementation two years later. However, the research findings have likely entered the base of a larger entity connected with the study of potential central bank-issued digital currencies.

The recent message on the website of the Bank of England tells that a new group of central banks, including the BoE, the Bank of Japan, the European Central Bank (ECB), the Sveriges Riksbank (Sweden) and the Swiss National Bank will all cooperate while researching the idea of CBDC. The relatively new agreement is supported by the Bank for International Settlements (BIS). The results of this joint global research may shape up the future world economy and especially its digital aspects.

The United States is not in haste to issue their own crypto dollar managed by the Federal Reserve (Fed). The topic is occasionally raised during the hearings in the US Congress. The most interesting discussion by far was in connection with the future national digital currency of China. The Chairman of the Federal Reserve Jerome H. Powell believes that a digital dollar and a digital yuan wouldn’t be comparable because of ‘a completely different institutional context’ while noting that every major central bank on the planet is currently ‘taking a deep look’ at CBDCs. In general, the Fed leader thinks a single dollar has served the United States well (and his successors will likely share the sentiment).

In China, a prototype CBDC is already tested out according to Mu Changchun, Deputy Chief in the Payment and Settlement Division of the People’s Bank of China (PBOC). Interestingly enough, their version of a CBDC might be one of the oldest in the world, as the development started in 2014. However, even six years later the Chinese state-backed blockchain devs still haven’t met all the necessary anti-money laundering (AML) standards, as stated by Yi Gang, head of the PBOC. As for the country’s president Xi Jinping, he recently called for ‘seizing the opportunities’ of blockchain, setting the paradigm for his subordinates in the Communist Party of China.

With large economies, it’s hard to create a working central bank-issued digital currency. The small ones, however, have more room for changes. The most recent example is the Marshall Islands where authorities chose Algorand blockchain as a basis for its national cryptocurrency. This is a stark contrast to many larger countries where CBDCs never left the discussion phase. The International Monetary Fund (IMF) even recommended the Marshall Islands to cancel the plans altogether, citing potential economic risks as a reason. In case with Estonia where state-managed processes started to move to the cyberspace even before Bitcoin was invented, the European Central Bank has likely played a role in the cancellation of a similar project. Considering the EU membership of Estonia, those actions are understandable — there should be no competitors to Euro coming from the member states.

The benefits of central bank-issued digital currencies are easily recognizable: a working CBDC is a secure system of payments backed by monetary reserves monitored by the government. However, the costs of transition and the fact that a cross-border CBDC might replace a local currency in countries with big inflation are not to be ignored. The latter is the most probable reason why the Bank of England has made CBDC so restricted in all of the three models described above. The current work of central banks studying this issue is to make the benefits outweigh the minimized economic dangers.

What does this all mean for cryptocurrency wallets and payment providers like Mercuryo? Judging by the atmosphere surrounding CBDCs today, unregulated crypto services will not get to the party when, say, a digital dollar is finally in place. This is a strategic reason for crypto acquiring to work in the legal field, consulting with financial regulators and adhering to related laws.