Central Banks and The Future of Money

Student number: 20055737 Module Code: UMED8Q-15-2 Module Title: Economics of Money and Banking Word Count: 2524 Coursework title: Central Banks and The Future of Money I EXECUTIVE SUMMARY This paper mainly researches CBDCs and reasons why central banks want to develop this kind of money worldwide The report also mentions whether CBDCs are suitable for Vietnam to develop This report is based on factual information obtained from reports and articles from financial analysts and the Bank for International Settlements (BIS) Based on the collected data, the report has introduced the concepts of CBDCs, the strengths and weaknesses they bring when a country develops in general, and Vietnam in particular The word has been done smoothly, but there are also limitations in confidential information EXECUTIVE SUMMARY INTRODUCTION The definition of CBDC Reasons central banks want to develop their digital currency (CBDC) a b The advantage of central bank digital currency .7 The advantage of central bank digital currency .7 The disadvantage of central bank digital currency Discussion CONCLUSION 11 REFERENCES 12 INTRODUCTION In the context of Industrial Revolution 4.0, online trading platforms are used more and more Understanding this, the Central Bank has been proposing policies to develop a digital currency to satisfy the needs of citizens However, besides the great benefits, the publishing of digital currencies also faces many inadequacies This paper will clarify the primary purpose of issuing digital currencies as well as the advantages and disadvantages MAIN RESEARCH The definition of CBDC First of all, digital currencies are encrypted currencies used to buy and sell goods and necessities According to the Bank of England (2020), digital currencies are defined as an electronic version of central bank money made by businesses and homeowners to transact currency or store value Another digital currency definition is money exclusively in electronic form (Rodeck D., April 2021) Curry B (2021) has pointed out that digital currencies have a unique feature different from electronic currencies: their conversion to physical form Digital currencies can be used directly, while electronic currencies need to be converted to physical form when transacting at an ATM Central Bank Digital Currencies (CBDC) is a digital currency issued, controlled, and guaranteed by the state bank or a sovereign territory (tapchibitcoin.io, 2019) Theoretically, CBDC is an invention that helps create a new digital mechanism to solve the real-time money transfer between two parties and make cross-border transactions easy, eliminating the payment intermediary of commercial banks According to Engert W (n.d), CBDC is essentially monetary value electronically stored digitally or as an electronic token that reflects a liability of the central bank and can also be used to make payments On the other hand, cryptocurrencies are also a form of digital currency and are confused with CBDC As Duncan F (2021) mentioned in an article on Intuition.com, cryptocurrencies, and CBDCs are entirely different in terms of transparency and coin structure While cryptocurrencies offer anonymity, CBDCs will be controlled by central banks to know who is holding this coin In addition, cryptocurrencies are created based on blockchain, and CBDCs are made from another technology platform The Shrimpy Team (2021) has added another difference between these two coins in terms of use cases CBDCs can only be used for currency transfers and bill payments However, people can use cryptocurrencies for both revenue and speculative purposes Moreover, according to Dickens S (2021), CBDCs is more likely to be used and stored using the centralized method, while cryptocurrency such as Bitcoin held on a decentralized blockchain network Reasons central banks want to develop their digital currency (CBDC) In a report by the bank for International Settlements (BIS), around 86% of the 65 central banks surveyed have some activity related to CBDC Accordingly, the factors driving this are consumer change (Thuy H., 2021) According to Deputy Governor of the Central Bank of Italy, Piero Cipollone, this will weaken the essential functions of the central bank According to the head of the Asia Pacific region of investment strategy firm Exante Data, Mr Grant Wilson (2020) said that the rapid acceleration of CBDC is partly due to the development of a digital currency called Libra by Facebook This has led central banks to realize the many potential impacts on the nation's financial system Therefore, they decided to issue similar coins to minimize the risks that will occur in the future In addition, according to the Banking Magazine (2020), the trend of non-cash payment due to the development of technology, computers, and smart mobile devices is increasingly popular and inevitable worldwide Some countries, especially the Nordic countries, have been implementing plans to extend the use of cash by 2023 Due to the explosion of digital currencies in Asia, China has taken the lead and is on track to realize its plan to become a cashless society Therefore, one leads to another The trend of electronic payment will weaken the role of the banking system, so central banks decide to issue CBDCs to consolidate and strengthen their presence in the payment field Finally, the issuance of CBDCs is also related to the competition among central banks in the world (Anh C., 2021) The ambition to gain the influence of national currencies on a global scale is what most central banks aim Central banks use CBDCs in the "currency wars" between great nations as a new weapon In addition, owning a solid currency, a modern technology platform, and a systematic investment will help these countries' CBDCs intervene and dominate the global financial system Considering these factors, central banks were eager to issue and use CBDCs as official currency Realizing the importance of developing a digital currency can help stabilize the value of money Against the crime relating to money (Ngoc D., 2021), on 15 June 2021, the prime minister assigned the State Bank to research, build, and pilot a virtual currency based on Blockchain technology for 2021 to 2023 to Decision 942/QĐ-TTG CBDCs are being seen as making essential contributions to modernizing the international monetary system and reshaping the global financial and payment structure These digital currencies will create many opportunities to accelerate digital transformation at businesses and financial institutions in integrating those digital currencies into the income and economic infrastructure According to experts' opinions and analysis, the acceptance of digital currency is not suitable for current practice in Vietnam However, our country also needs to prepare and develop appropriate and prudent solutions to grasp the world's trends Therefore, it is necessary to systematically and thoroughly analyze the issues related to this currency, thereby providing more practical evidence for the management and administration The advantage of central bank digital currency a The advantage of central bank digital currency CBDC is currently considered one of the potential investment projects when the technological society is increasingly developing Besides bringing countless great benefits, it also has many disadvantages First of all, Bastos V (n.d) wrote an article on zerocap.com about the benefits of CBDCs, including simple cross-border transactions, social inclusion, and combat illegal activities Accordingly, with CBDCs, local or international transfers can happen almost instantly and require much lower fees than the traditional system He believes that reducing remittance fees with faster transfers will help the economy grow and encourage the lower classes through lower costs and higher access to capital In addition, about social inclusion, he thinks that developing CBDC is beneficial for those who not have a personal bank account Bastos and Binh Ng (2021) also made similar observations in a financial journal article According to the statistics of Merchant Machine (2021), Vietnam is ranked 2nd in the world, with 69% of people who have not used financial services and have not had a bank account Therefore, the issuance of CBDC will help people to be more inclusive This is perhaps the most valued and top priority benefit Finally, CBDCs can help prevent illegal financial activities Due to the nature of central bank control, using CBDC to settle funds and transactions makes it easier to identify and trace the sources of funds, significantly reducing the risks of fraud and laundering Money However, this benefit can come with some disadvantages In addition, for Vietnam, CBDC will bring significant advantages, including developing payment service providers According to Ms Pham Thi Thai Ha, a master of Finance and Accounting, Nguyen Tat Thanh University, Vietnam has a lot of potentials to deploy its legal digital currency and promote the policy of restricting transactions by digital currency following Decision No 2545/QD-TTG and Directive No 22/CT-TTG of the Prime Minister on promoting non-cash payment According to the State Bank, by the end of April 2021, over 79 payment service providers nationwide deploy amounts via the internet, and 44 pay via mobile phones In the first four months of 2021, electronic payment via the internet, mobile phone, QR Code achieved remarkable results, attracting many customers to use b The disadvantage of central bank digital currency CBDCs are a currency with great potential for a country that owns them However, owning and using CBDCs also brings many disadvantages to these countries in general and consumers in particular First of all, CBDCs are coins issued by the central bank Therefore, the central bank can control the CBDC in any form This makes the currency lose its security In addition, according to Ledger Insights (2020), CBDCs can make commercial banks no longer financial intermediaries when consumers transfer money from bank accounts to CBDCs At that time, commercial banks will start to raise deposit rates to attract more capital In return, less bank credit will be extended with higher interest rates This will lead to competition growing among commercial banks Not stopping there, CBDCs are expected to increase the risks in banking operations throughout the system (Geroni D., 2021) In addition, another of central bank digital currency is that there will have geographical restrictions between countries as each coin is different CBDCs will only be available in the country that owns them Financial analysts have pointed out some potential risks in Vietnam when officially issuing digital currency According to Ha T (2021), in the Vietnamese market, the most crucial downside of CBDCs is that they will destabilize the banking system She pointed out that owning CBDCs will cause commercial banks to lose potential customers Instead of owning a personal bank account, they open a digital central bank account because of its safety and low cost At that time, there were many possibilities where many digital currencies would likely exist, but in the end, CBDC had the upper hand However, suppose CBDCs are not attractive enough compared to other currencies In that case, policymakers face the risk of losing control of the money-financial market, and stable and reputable, convertible at a fixed rate to existing national currencies, will quickly dominate the market Discussion With the development of CBDCs of many countries worldwide, Vietnam is also affected and affected by this The Vietnamese currency is not strong in the world today Not only that, although currently the economy and financial market have developed rapidly, it is not a significant competitor compared to other powerful countries As for the financial system, the impact of countries issuing CBDCs has made the Vietnamese market unstable Capital flows and speculative cash flows using CBDCs from abroad can suddenly be injected and withdrawn, causing the economy to wobble and have great shocks, especially when Vietnam's economy is heavily dependent on import and export activities Not only that, foreign CBDCs can cause dollarization of the economy and threaten monetary sovereignty On the other hand, for monetary policy and the position of central banks, the fact that cash flows and transactions are beyond the control of domestic regulatory agencies makes it challenging to create statistics and measure the total amount of money Determining the goal becomes very difficult This hurts central banks' right to implement monetary policy proactively Online payments are gaining popularity during the current COVID-19 pandemic due to their convenience Besides avoiding direct contact and human-to-human communication to ensure health and safety, online payment also helps reduce cash and printing capital Not only that, but this is also the right time to help countries in general and Vietnam, in particular, realize their cashless payment plans The impact of foreign CBDCs on Vietnam is currently not significant because most countries are still in the research and development stage However, Vietnam cannot stand aside from the inevitable development trend of CBDCs globally In the immediate future, Vietnam needs to carefully observe and study the movement and development of CBDCs in the world, so that appropriate mechanisms and solutions can be foreseen to cope with and adapt to the development trends and impacts the influence of CBDC countries, massive countries in the future Vietnam should improve and strengthen the official payment system (managed and hold a leading role by the Government) CONCLUSION To sum up, CBDCs are a digital currency that brings many benefits and disadvantages to a country But undeniably, owning CBDCs helps the country get rid of technological obsolescence and brings a lot of positivity to the country's finances Therefore, 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The definition of CBDC Reasons central banks want to develop their digital currency (CBDC) a b The advantage of central bank digital currency .7 The advantage of central