Central bank digital currency & Bangladesh

Lately, the emergence of central bank digital currency (CBDC) has received a lot of attention in the media and among the general public. In simple words, CBDC means that a central bank is issuing electronic currency instead of physical or paper money. Over the short- to medium-term, both digital currency and paper currency may coexist in an economy, but eventually, the digital currency has the potential to replace paper money completely. An example of CBDC is the Bangladesh Bank's issuing digital taka, which we will call here "e-taka".

The recent decision by the People's Bank of China (PBOC) to roll out the digital version of physical yuan ("e-yuan") has prompted both the European Central Bank (ECB) and the Federal Reserve-among other central banks-to consider issuing CBDCs. In a nutshell, China's decision to issue e-yuan is a measure to recalibrate the balance between the state and private sector (e.g., Alipay). An old literature in oligopoly argues that in a market served by a few private firms, a state-owned or government backed company can always threaten to enter should private firms deviate too much from a common goal. For example, suppose a private company serving electricity to a jurisdiction that leaves out marginalised customers. In that case, a state-owned firm might enter to increase output, causing private firm's profit to decline. This potential threat from the state-owned firm acts as a discipline mechanism for private firms, so they behave predictably. Something similar is at play between PBOC and Alipay in China.

A CBDC is different from paper money in that the holders of CBDC will likely not earn any interest. Otherwise, people will shift their deposits from commercial banks to a central bank account as the latter is perceived as a risk-free entity. This will undermine the very purpose of financial intermediation in an economy. So, 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 because of the possible lack of anonymity of the former, the central bank can track our expenses. This is similar to using platforms like bKash and Rocket, where the service providers have information of our every cash-in and cash-out transaction. Central banks have the monopoly power to issue fiat money, and now they also want to maintain some control over digital payments. This is one of the reasons why Nagad was created, so that the digital payment system is not 100 per cent controlled by private companies. 

A related issue to look at is why central banks dislike cryptocurrencies, despite crypto's increasing acceptance. Central banks do not want to lose the monopoly over physical currency and the associated seigniorage revenues. Moreover, if more transactions are conducted with cryptocurrency, it will undermine central banks' monetary policy. Stephen Jen, a hedge fund manager based in London, rightly points out that CBDC is an antithesis of cryptocurrency. Whereas a cryptocurrency is anonymous and decentralized, a CBDC lacks anonymity and is centralized.

When all major central banks choose to use CBDC, imagine what might happen. Many people keep foreign currencies with them for business and travel purposes. How much and in what denomination of foreign currencies we hold, will be known to the issuers of the CBDCs. Moreover, right now, we are not being directly taxed for holding US dollars with us. When there is a digital version of the US dollar ("e-USD"),  some tax may be levied on the dollar holdings. Therefore, the way the US Treasury and G20 countries are now calling for a global minimum tax for corporates, a similar move may come from the Fed and other G20 central banks for a similar tax on CBDCs, especially for vehicle currencies. However, it is likely that these taxes will be initially levied on corporates than households. But one thing is clear, central banks will embrace digital currencies and the 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 though developed countries disproportionately benefit from illicit cross-border flows.

What do all these developments mean for Bangladesh? A digital taka (e-taka) may make the payment system faster and cheaper. Currently, it takes 30 minutes and 100 taka surcharge to transfer 1 lac taka through the real-time gross settlement service, given that the transaction request is placed between 10 am and 3 pm. In Europe, it takes only 10 seconds to process a payment at the cost of €0.002 per transaction (equivalent to 20 paisa in Bangladesh). An e-taka will also save hundreds of crores of taka required to print cash notes. For example, it takes 8 taka to print a 1,000 taka note, and nearly 2 taka to mint a 5 taka coin.

But the most significant gain to be had from the introduction of "e-taka" is that it will allow the government to track its fiscal disbursement for development and other functional services. So, public officials who take advantage of stealing and accumulate physical money because it takes time for the government to identify them (often they are identified right after their retirement), will find it most challenging, if not impossible, to steal public e-money. Just as introducing the electronic government procurement (E-GP) system has raised the quality and competitiveness of bidding for public projects, the mandatory use of e-taka in public works will make the system more transparent and counter 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, reducing the misuse of funds. Furthermore, digital money can be programmed not to be used in certain transactions. For example, a diabetic patient may not be able to buy unhealthy food with digital money. We can also track where our zakat and sadaqah contributions are spent. All these benefits come, of course, at the cost of privacy, which we value a lot in Bangladesh. For instance, compared to many countries globally, the Chinese are most used to being tracked by their government, and it is said there 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 this will defeat the system's purpose. Although the new competition from CBDCs will likely make banking services cheaper, quicker, and fairer. Needless to say, whether digital money is run by private banks or by a central bank, the greater concentration of digital money will make the system more vulnerable to cyberwarfare.

China invented paper money in the 7th century and monopolised currency issuance in the 11th century. So it's not surprising that the PBOC is the first major central bank to introduce an e-currency. The Fed, the ECB and other central banks will likely issue their own CBDCs in the coming years. The CBDCs could act as a strong countermeasure against cryptocurrencies and have the potential to become a dominant medium of exchange.

The author is a professor of economics at East West University.

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