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Central Banks Taking a Look at Digital Currencies

By:
Kenny Fisher

With the explosion in technology that has led to crypto-currencies, central banks are taking notice. Could we soon see digitalized dollars and euros?

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When forex traders and investors check their favorite financial portal for the latest developments, in addition to the latest quotes for major and minor currency pairs, they are likely to see quotes for digital currencies. Trading in digital currencies, such as Bitcoin, have become immensely popular in recent years. Could we soon see central banks also and issue their own digital currencies?

According to the Bank for International Settlements (BIS), which promotes international financial cooperation among central banks, the answer is affirmative. Central banks appear eager to jump on the technology bandwagon. A just-released survey by the BIS found that 20% of 66 central banks stated they were likely to issue a digital currency within six years, compared to just 10% in a survey one year ago. Among the central banks surveyed, some 80% said that they were examining the technology.

It should be noted that a central bank digital currency (CBDC) is very different than current crypto-currencies. The latter are produced by complex algorithms and are not centrally controlled. In contrast, CBDCs would be a country’s “traditional” currency, but in digital form, controlled by the central bank.

Last week, five central banks announced that they were exploring issuing a digital currency. These include the Bank of England, Bank of Japan, European Central Bank, Bank of Canada, and Sweden’s central bank. The conservative, “stuffy” attitude of central bankers towards digital technology appears to have shifted recently as a result of Facebook’s plan to launch its Libra cryptocurrency later this year. With some 2.5 billion users on Facebook, central banks are concerned that a popular, privately-run cryptocurrency could potentially undermine central banks and reduce their control over monetary policy.

The BIS survey found that traditional currencies are not about to be replaced, noting that “cryptocurrencies remain a niche means of payment.” Still, central banks are finding that cryptocurrencies have become too large a technology to ignore, so digitalized euros, dollars or pounds could be just a few years away.

About the Author

Kenny is an experienced market analyst, with a focus on fundamental analysis. Kenny has over 15 years of experience across a broad range of markets and assets –forex, indices and commodities.

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