The rapid development of central bank digital currencies could help to boost financial inclusion and stability, but they pose a threat to banks and could weaken their ability to lend, according to a report by Fitch Ratings.
CBDCs would help to speed up cashless payments and could "bring underbanked communities into the financial system" in many emerging markets.
In the Bahamas, for instance, where the "Sand Dollar" CBDC was introduced in October, low-value CBDC transactions can be carried out using just a phone number or an email address for identification.
“The deployment of CBDCs will create opportunities to strengthen financial system inclusion, innovation, resilience and efficiency, but may also give rise to new risks,” said Monsur Hussain, an analyst at Fitch Ratings and co-author of the report.
For instance, CBDCs "will inevitably involve households and businesses converting some of their commercial bank deposits into CBDCs", the report said.
"All other things being equal, this would require banks to shrink their balance sheets", affecting their capacity to lend, it said.
China was one of the first major economies to develop plans for a CBDC back in 2014 and has already begun limited trials via mobile apps. Other major economies are quickly following suit.
Last month, the Bank of Japan began a year-long series of experiments for a digital yen and the UK Treasury and Bank of England set up a joint task force to develop a CBDC, nicknamed the "Britcoin".
And on Thursday, Federal Reserve chairman Jerome Powell announced that the US central bank will publish a discussion paper over the summer "outlining our current thinking on digital payments, with a particular focus on the benefits and risks associated with CBDC in the US context".
The Fed will listen to a range of voices before deciding "whether and how to move forward with a US CBDC, taking account of the broader risks and opportunities it could offer", said Mr Powell.
Whether or not the Fed proceeds with a CBDC, "we expect to play a leading role in developing international standards for CBDCs, engaging actively with central banks in other jurisdictions as well as regulators and supervisors here in the US", he said.
Governance and oversight of CBDCs is an issue that many of the pilot projects are wrestling with – particularly how to make digital payments easier while replicating the "anonymity of cash", Fitch Ratings said.
Complete anonymity for transactions is probably unlikely, given that this is one of the challenges central banks face with the growth of cryptocurrencies as an asset class and their widespread use in illicit activity.
Cryptocurrencies "have not served as a convenient way to make payments, given, among other factors, their swings in value", said Mr Powell.
He also indicated that as "stablecoins" – digital assets that are linked to the US dollar or other currencies – grow in use, so will the Fed's oversight of them.
Although users "may be reluctant to accept a digital cash substitute if it does not grant a sufficient degree of privacy", trade-offs already exist between anonymity and regulators' ability to track illegal activity, even through the use of cash, the Fitch report said.
"There may be variations in anonymity between markets, depending on local attitudes among the public and regulators. Party identification data may, for example, be limited between transaction participants. However, we believe in general that central banks and regulators are likely to have access to such information with CBDC transactions," said Fitch Ratings.
CBDCs could also give governments and central banks much greater control over how money is used, with programmable smart contracts allowing them to embed restrictions in how a currency is spent, for example.
A digital currency distributed as part of stimulus packages could also have expiry dates to encourage it to be spent within a specific period of time, the credit rating agency said.
Another potential benefit is the use of CBDCs in cross-border payments. The central banks of the UAE and Saudi Arabia concluded a year-long study known as Project Aber last year, which "confirmed that Distributed Ledger [blockchain] Technology can provide central banks with the ability to reimagine both domestic and cross-border payment systems in new ways".
In February, the UAE Central Bank said it was participating in a central bank digital currency project with the Hong Kong Monetary Authority, the Bank of Thailand and the People's Bank of China to investigate the use of CBDCs in cross-border payments.
"With issuance of CBDCs, money transfers [within and between countries] could be improved in terms of efficacy and cost," Deutsche Bank's chief investment officer Christian Nolting said in a note to clients last month.
However, any cross-border payment system that reduces the dominance of the US dollar in the global financial system could face challenges, Fitch Ratings said.
"Previous efforts to develop payment systems to bypass those controlled by the US have struggled, such as one launched by the EU to allow trade with Iran after the US tightened sanctions in 2018. This partly reflects the strong network effects enjoyed by incumbent systems, as well as the complexity of negotiating interoperability between jurisdictions."
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Company Profile:
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Date of start: 2013
Founders: Rashi Chowdhary and Saad Umerani
Based: Dubai
Size, number of employees: 12
Funding/investors: $400,000 (2018)
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Benefits of first-time home buyers' scheme
- Priority access to new homes from participating developers
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Global state-owned investor ranking by size
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Specs
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UAE currency: the story behind the money in your pockets
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Manchester United v Club America
When: Thursday, 9pm Arizona time (Friday UAE, 8am)
Specs
Engine: Dual-motor all-wheel-drive electric
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Age: 59
From: Laguna, The Philippines
Favourite dish: Seabass or Fish and Chips
Hobbies: When he’s not in the restaurant, he still likes to cook, along with walking and meeting up with friends.
MOUNTAINHEAD REVIEW
Starring: Ramy Youssef, Steve Carell, Jason Schwartzman
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Rating: 3.5/5
What is dialysis?
Dialysis is a way of cleaning your blood when your kidneys fail and can no longer do the job.
It gets rid of your body's wastes, extra salt and water, and helps to control your blood pressure. The main cause of kidney failure is diabetes and hypertension.
There are two kinds of dialysis — haemodialysis and peritoneal.
In haemodialysis, blood is pumped out of your body to an artificial kidney machine that filter your blood and returns it to your body by tubes.
In peritoneal dialysis, the inside lining of your own belly acts as a natural filter. Wastes are taken out by means of a cleansing fluid which is washed in and out of your belly in cycles.
It isn’t an option for everyone but if eligible, can be done at home by the patient or caregiver. This, as opposed to home haemodialysis, is covered by insurance in the UAE.
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$1,000 award for 1,000 days on madrasa portal
Daily cash awards of $1,000 dollars will sweeten the Madrasa e-learning project by tempting more pupils to an education portal to deepen their understanding of math and sciences.
School children are required to watch an educational video each day and answer a question related to it. They then enter into a raffle draw for the $1,000 prize.
“We are targeting everyone who wants to learn. This will be $1,000 for 1,000 days so there will be a winner every day for 1,000 days,” said Sara Al Nuaimi, project manager of the Madrasa e-learning platform that was launched on Tuesday by the Vice President and Ruler of Dubai, to reach Arab pupils from kindergarten to grade 12 with educational videos.
“The objective of the Madrasa is to become the number one reference for all Arab students in the world. The 5,000 videos we have online is just the beginning, we have big ambitions. Today in the Arab world there are 50 million students. We want to reach everyone who is willing to learn.”
Need to know
When: October 17 until November 10
Cost: Entry is free but some events require prior registration
Where: Various locations including National Theatre (Abu Dhabi), Abu Dhabi Cultural Center, Zayed University Promenade, Beach Rotana (Abu Dhabi), Vox Cinemas at Yas Mall, Sharjah Youth Center
What: The Korea Festival will feature art exhibitions, a B-boy dance show, a mini K-pop concert, traditional dance and music performances, food tastings, a beauty seminar, and more.
For more information: www.koreafestivaluae.com
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Tearful appearance
Chancellor Rachel Reeves set markets on edge as she appeared visibly distraught in parliament on Wednesday.
Legislative setbacks for the government have blown a new hole in the budgetary calculations at a time when the deficit is stubbornly large and the economy is struggling to grow.
She appeared with Keir Starmer on Thursday and the pair embraced, but he had failed to give her his backing as she cried a day earlier.
A spokesman said her upset demeanour was due to a personal matter.
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Starring: Sydney Elizebeth Agudong, Maia Kealoha, Chris Sanders
Director: Dean Fleischer Camp
Rating: 4.5/5
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