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5 December 2023
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Token money is a form of money based on distributed ledger technology (DLT). Like book money, token money can be issued by both private individuals and central banks. In the case of private issuers, they are referred to as stablecoins; in the case of central banks, they are called central bank digital currencies (CBDCs). The European Central Bank (ECB) launched the preparatory phase for a CBDC in the euro area, the digital euro, in mid-October 2023.
Previous experiences with CBDCs circulating among the population in the Bahamas, Jamaica, and Nigeria have not been crowned with success. In Africa’s most populous and economically powerful country, hardly anyone uses the currency. Resistance is fueled by a variety of arguments. The US Congress, for example, has banned the Federal Reserve from issuing a CBDC because it sees civil rights threatened by surveillance and control. The American Bankers Association, on the other hand, fears that the role of banks as financial intermediaries will be undermined. Finally, large segments of the population, especially in traditional “cash countries” such as Switzerland and Germany, simply do not want to give up banknotes.
Ideally, the two should go hand in hand: the physical banknote combined with its digital counterpart. In 2021, Swiss banknote manufacturer Orell Füssli demonstrated that this is technically possible by designing a hybrid form of money. This intelligent banknote feels like a normal one and also fulfills all the functions of the physical means of payment. At the same time, it can be transferred to a digital wallet at any time by scanning the QR code hidden under a scratch field with the private key. Once the smartphone has successfully authenticated the banknote, its value is stored in a blockchain and the bill is invalidated. Whether the physical banknote still has the printed value or is already registered as a digital asset can be determined by scanning the second QR code with the public key.
This option was raised in a May 2023 handbook on offline payments using CBDC published by the Bank for International Settlements as part of its Polaris project. A report by the Central Bank of Kenya, also published in May, summarizing the status of its CBDC discussions, including with countries such as the US, UK, Germany, and Switzerland, noted, “It was proposed that a smart bank note would serve the same purpose as CBDC without requiring similar resources”. The Central Bank of Kenya concluded that this suggestion should be explored further. It remains to be seen whether other central banks will follow suit.
Gabriel Juri SIX
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