New Age of Currency Is Coming
New Age of Currency Is Coming
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  • 승인 2021.08.31 23:00
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  Recently, the form of currency is changing by the movement of Europe and various large companies such as Facebook, Starbucks. Currency means the value of things, a medium of exchange, and uses for storing up the property. The form of currency has been changing continually in human history from stone to silk, metal, and even cash. The next form of currency will be a “Digital Currency”. In the near future, people might not have cash in their wallets and all kinds of payments could be possible through the smartphone. 


   Facebook issues cryptocurrency, Starbucks invests in Bitcoin exchanges and people can pay with Bitcoin through PayPal, an online payment system. Cryptocurrency, Bitcoin, and PayPal are all digital currencies. Digital currency means changing the monetary value to digital information and using it online by storing it on the computer or Integrated Circuit (IC) Card. With the development of Information Technology (IT) and the spread of COVID-19, the global payment system is changing to a digital system in many countries. While the world is changing to digital, due to COVID-19 outbreaks, digitalization, as a replacement for cash, prevents infections from spreading further. Recently, the digitalization of currency has led to many discussions. 



▲ The proportion of National Cash Payment (source= Bank of Korea)
▲ The proportion of National Cash Payment (source= Bank of Korea)



  In Europe, where cash usage is relatively high, credit cards and electronic payments are increasing now. According to European Central Bank (ECB), the average portion of cash payments in the eurozone was 53.8 % in 2018. It is a much higher portion than the USA (26%) and South Korea (19.8%). According to the German Central Bank (Deutsche Bundesbank), the number of German consumers using digital payment systems increased 18%p from 25% to 43%, of which 68% said they preferred credit cards and electronic payment systems in April 2020. The data of payment in Germany shows that the rate of using digital systems has rapidly increased, and the interest in digital currency has also increased in Europe.


  Not only in Europe, as developing information and communications technology, people are gradually recognizing that cash and banknotes that central banks issued are inconvenient to manage and burdensome in terms of asset management. The importance of non-cash payment methods, such as credit cards, mobile banking, and simple payment methods, is increasing worldwide. According to these changes, ECB is planning to introduce a digital euro. By a drift of Europe, a lot of central banks in the world are studying or experimenting with digital currency. Thus, when the cash-based euro switches to a digital currency in the future, it will be necessary to investigate what changes the euro will bring to the European market and the global market.


Features of Central Bank Digital Currencies

  Central Bank Digital Currency (CBDC) is the currency that uses electronic funds transfer between users electronically. It is applied to the same exchange rate as a legal currency that distinguishes virtual currency from private-issued currencies and ensures the credibility of the currency without the risk of value fluctuations because the central bank issued it. According to a report by the Market Committee in 2018, it said that CBDC is an electronic form of currency issued by the central bank. Although it is an electronic form of currency issued by the central bank, it is defined comprehensively, saying it is different from existing money reserves used for payment.

  The biggest difference between CBDC and private cryptocurrencies such as Bitcoin and Ethereum is that CBDC is issued and regulated by the financial authorities of countries. In other words, CBDC combines the efficiency of the digital payment system and the safety of the central bank currency and it is expected to be a safer and faster means of payment. According to a report that Bank for International Settlements (BIS) published in January 2021, 86% of worldwide central banks are actively discussing the introduction of the central bank digital money, most of which are based on Distributed Ledger Technology.


Accelerating the introduction to digital euro

  In June 2019, Facebook officially announced its plan to issue its virtual currency, “Libra”. This movement of Facebook triggered accelerating discussions on digital currency among the central banks and financial authorities around the world. Additionally, the acceleration of the introduction of the digital euro is due to COVID-19. According to the Bank of Korea (BOK), the amount of cash used remarkably decreased because of the possibility of spreading the virus and social distancing such as in the UK, the USA, Germany, and South Korea. There is a clear reason why ECB has to introduce the digital euro as soon as possible. On April 2021, Olaf Scholtz, German Federal Finance Minister, urged, "Europe needs innovative and competitive means of payment to maintain the sovereignty of a single currency and progressive efforts to introduce the digital euro in Euro group."


Changes in the cash system around the world 

  With traditional currency concepts and practices expected to change not only in Europe but around the world, central banks, the main issue of currencies, are also trying to digitize currencies accordingly. Central banks of six developed countries, led by BIS, announced that they will share economic, technical knowledge, and experience. Central banks of major countries, including Korea, are conducting various research on electronic currency issuance. 

In Korea, the Bank of Korea did open a research result to the public about CBDC last year. This research has great significance to analyze the system of law related to CBDC first after BOK established a team of exclusively charged to CBDC. Through these movements of BOK, there was the analysis that BOK is going to embody the introduction of CBDC. Also, the research said that BOK will admit only CBDC as a currency that they issued. Now, BOK is planning to conduct the CBDC simulation for the first time in August. IT companies such as Naver and Kakao will participate to help simulation of BOK.

According to BIS, 86% of the central bank are now studying research about CBDC. The central banks in other countries are immersed in a study about it. Among major countries, China is the most active in issuing CBDCs and officially reported issuing them in July 2018. Since last year, China has been conducting a test trial to allow citizens living in major cities, including Beijing, to give and use digital Chinese yuan. In emerging countries, such as Uruguay and Tunisia, the central banks are trying to issue digital currencies to compensate for the lack of population, and cash use and financial services such as payment and settlement services. 


The main issue of introducing the digital euro

  Unlike cash, the digital euro can reduce the costs of managing a currency because it does not cost anything to issue and it holds large amounts of money. It is also expected to help prevent money laundering because it is difficult to maintain anonymity with CBDCs. Nevertheless, there are some problems that people have to solve. At the beginning of the introduction of the digital euro, European citizens wanted to own all their assets in the digital euros. It could lead to Digital Bank Run that many clients withdraw their money from a bank, resulting in huge financial chaos by disordering deposit transfers and operations. To prevent this chaos, the European Central Bank has proposed limiting the amount of digital euro individuals can keep. 

  Forty-one percent of the respondents who attended public hearing among three months conducted by ECB cited privacy as their biggest concern, followed by security (17%) and the possibility of Pan-European use (10%). With the result of the public hearing, the ECB and members of its have established basic requirements for digital euro, such as accessibility, robustness, security, efficiency, protection of personal information protection, and compliance with laws. Therefore, ECB will continue its discussion on the appropriateness of the introduction of the digital euro by closely examining the benefits and risks of the euro, referring to the results of its earlier report and opinion collection. 

  Fabio Panetta, an executive of ECB and chairperson of the Task Force, said at a public hearing in January 2021, "Digital money issued by public organizations unrelated to commercial profits by personal information is a means of strengthening personal information protection." He stressed that personal information protection is a key element in modern democracies and values that Europe pursues, and the digital euro will be constructed on this basis.

  Based on these discussions, it is expected that ECB decides whether to promote the introduction of the digital euro in the summer of 2021. According to ECB, it is expected to take at least 18 months to up to three or four years to review the validity of the digital euro and start introducing it to build a legal foundation.


Lee Seung-ho, a researcher at the Korea Capital Market Institute said, “Digital currency issuance of the central bank has a wider impact on the national economy and is more complicated than expected.” 


  The global financial environment is expected to undergo fundamental changes as countries accelerate the introduction of their digital currencies and discuss how to set up transactions between countries. In addition, the issuance of digital currency by the central banks is expected to have a wide range of effects on the stability of payment and settlement, the effectiveness of the monetary policy, and the maintenance of financial stability. To cope with these fears about CBDC, the central banks around the world including South Korea need to devise efficient transactions of digital currency and provide users with various systems that maintain their safety of currency and secure their privacy.




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