A Chilean Cryptocurrency

by | May 12, 2022

The Central Bank, within its mandate to ensure the normal functioning of internal and external payments, has addressed the relevance of issuing a digital currency (MDBC for its initials in Spanish), considering the current progress in the digitization of transactions.

As a first step, the Central Bank issued a report on May 11th, which explores the eventual issuance of said currency. This report will be the basis for starting a process of interaction with different interested agents, which is expected to enrich the analysis of the potential issuance of a MDBC in Chile.

The report addresses traditional forms of payment, as well as innovation and challenges to consider. It is pointed out that, today, the vast majority of payments are made using cash or money in demand deposits, but the preference for one or another form of money depends on its adaptation to the needs of people, which change over time.

In this sense, as technological advances and the digital economy increase, the use of cash issued by the Central Bank has limitations that are more evident.

The reported benefits and risks associated with issuing a Central Bank digital currency are detailed as follows.

As benefits, it is indicated that a MDBC is a digital financial asset, which would be used for non-face-to-face transactions. In addition, it is expected to be a platform for the development of various payment services, promoting competition and innovation. Additionally, a MDBC could be useful to face some challenges not analyzed in the report, such as the integration of cross-border payments and the development of payments of high financial value.

As risks, it is pointed out that it can affect the performance of the financial market, such as the Bank’s ability to intermediate public resources and financial stability by providing a new asset that could be particularly attractive as a “refuge” in periods of uncertainty. Another challenge will be the new relationship between the public and the Central Bank, since the issuance of a MDBC implies an unprecedented closeness between the direct public and this institution. Likewise, the issuance of a MDBC will require modifications to the legal framework in force in the country, to grant legal certainty to the issuance and processing operation in the financial market.

Due to the foregoing, the Central Bank considers that there is still not enough information to make a final decision regarding the issuance of a MDBC, it does consider that it is an option with high potential.

Preliminarily, it is necessary to evaluate the technical feasibility of achieving a MDBC with the desired standards and characteristics. Second, it is not clear what the countries with the main financial centers will do in this matter, which is particularly important so that MDBCs also serve to increase the efficiency of cross-border payments. Finally, the final decision must carefully consider the costs and benefits of this option and compare it with other alternatives, something that will only be clear with a more concrete project.

As the next step for the eventual development of a MDBC, the Central Bank points out that it is necessary to deepen the analysis presented in the report, considering the vision of the other agents involved, both from the public and private sectors. To achieve this, the Central Bank announced that it will hold a series of seminars, presentations, and meetings with different counterparts. These will have the purpose of gathering information and visions in the different areas that affect the evaluation and potential issuance of a MDBC, and thus integrate them into the analysis of the next steps that must be taken in this process, and into the planning of proofs of concept.

The result of this dialogue will be published in a new report towards the end of 2022, and the different activities of the other agents involved, both from the public and private sectors, will be announced in due course through the Central Bank’s website.

 

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