Explainer | Which central bank will launch world’s first digital currency?

Sovereign digital currencies are traditional money, but in digital form, that will be issued and governed by the world’s regional central banks

China has made rapid progress while other members of the G20, and the likes of Sweden and Cambodia, are also at various stages of research and development

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A number of central banks are at various stages in creating and testing sovereign digital currencies. Image: SCMP Graphics

Published: 4:00pm, 14 Oct 2020Updated: 4:00pm, 14 Oct 2020

The race among central banks to launch sovereign digital currencies is heating up. China has made considerable progress, with hopes of using its nascent digital currency to help internationalise the yuan, but several other nations are warming to the idea of relying less on cold, hard cash in more flexible payment systems.

What is a central bank digital currency?

Central bank digital currencies are traditional money, but in digital form, issued and governed by a country’s central bank.

They differ from decentralised cryptocurrencies, including bitcoin, which are based on blockchain technology, with each transaction verified by a network of computers.

In contrast, China’s version of a sovereign digital currency – the so-called Digital Currency Electronic Payment (DCEP) – is managed privately by the People’s Bank of China (PBOC) under a centralised system and does not use blockchain technology. Unlike with cryptocurrency, there is no presumption of anonymity in the use of sovereign digital currencies, and their value will be as stable as physical currencies.

What is driving central banks to consider digital currencies?

Triggered by regulatory concerns over bitcoin, Facebook’s proposed Libra token and rising interest in contactless payments amid the coronavirus pandemic, central banks around the world have jumped on the bandwagon to assess the need for their own digital currencies.

“Some central banks see [digital currencies] as a useful tool, especially to go fully cashless,” said Leonhard Weese, president of the Bitcoin Association of Hong Kong, adding that this could include a desire to “monitor transactions, circumvent the banking sector, and get a hold of more monetary tools for the future, such as negative interest rates or helicopter money. “I assume that some central banks are more interested in these policy goals and monetary tools than others.”