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Central Bank Cryptocurrency Market & Blockchain Tech

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Decline in cash makes officials consider digital currencies

Plastic cards, mobile phones and internet payments mean we’re using less cash. Now some central banks are wondering whether to launch their own digital currencies that replicate the properties of paper money in electronic form.

Cash is no longer king in many economies. The spread of smartphones in emerging markets is hastening its demise but business everywhere is counting the costs associated with accepting cash payments. Fewer than 10% of purchases by under-29 year-olds in Denmark use cash and the decline in Sweden is so severe that ATMs there fell by 13.2% in 2016.

Sweden’s Riksbank could thus be first to issue a digital currency, but research is under way from China to Canada and from Singapore to Saudi Arabia.

Have central banks simply got caught in the excitement that caused private cryptocurrency prices to soar before falling? It is on the agenda now because the blockchain technology (see graphic) permits it, but some countries worry not only about diminishing cash usage but also that the private sector has complete control over payments within their economies.

A blockchain is a chain of information-filled blocks connected by digital cryptography. Each block has a reference to the previous block and a mechanism within the blockchain verifies each new transaction and adds it to the chain.

A central-bank digital currency could provide competition, lowering fees and transaction costs. It could also provide information from the millions of daily transactions and might tackle tax evasion and cut corruption or criminal money flows.

And in the future, such a product could change monetary policy, making negative interest rates more viable and reducing the need for quantitative easing.

China is looking at whether digital currency would allow better monitoring of its financial system; South Korea thinks an official alternative might thwart the threat of private cryptocurrencies. Authorities in Canada and Singapore are investigating ways to streamline interbank payments.

A central-bank digital currency would differ from a private cryptocurrency by being a claim on the national bank, not just an asset. It would have to be available to everyone and accepted as a means of payment, and it would have to be risk-free with a stable value, freely converted from banknotes or deposits at face value.

But critics ask why a cryptocurrency issued by a central bank is needed when the current system is working and the cost of payments between banks and individuals has fallen sharply.

They ask whether blockchain can process transactions fast enough to become a legitimate alternative to traditional payments. Commercial payment systems process an average 1,600 transactions a second and have capacity for up to 56,000: the leading current cryptocurrency struggles to handle more than four.

There are concerns too at hacking or data getting into the wrong hands. And even a brief outage of a central bank’s system could permanently lower confidence in the whole financial system.

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