Opinion | ChatGPT may have stolen the spotlight, but central bank digital currencies are the innovation to watch

Central banks across the world are responding to the challenge posed by the rise of decentralised finance by creating their own digital currencies

Central bank digital currencies have the potential to revolutionise the global monetary system and give billions of unbanked or underbanked people access to finance

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A customer makes a payment using China’s digital yuan, or e-CNY, at the Wangfujing Department Store in Beijing. Central bank digital currencies allow central banks to retain control while providing a financial system that avoids scams. Photo: Getty Images

Published: 1:30am, 1 Jul 2023

ChatGPT has been touted as the tech breakthrough that could revolutionise daily operations, raising productivity and ushering the world into a new era. However, a series of technological innovations beginning with the digitisation of financial services, including blockchain and the arrival of digital currencies, is slowly but surely transforming the financial landscape.

As central bankers grapple with the complexity of digital money, they have come to realise a new monetary system is already on the cards and could be close to reality. What will this new monetary system look like?

The Bank for International Settlements (BIS) is the de facto central bank of central banks. Its real function is to be the intellectual hub where central bankers analyse and discuss emerging challenges and issues.

Its annual report is the authoritative view of how mainstream central bankers see the world. In recent years, it has led thinking by exploring the implications of digitising money on the role of central banks. Beginning in last year’s annual report, the BIS has started talking about three journeys – monetary and inflation trends, including interest rate tools; their impact on financial stability; and how technology is transforming the financial landscape.

Central bankers stand at the apex of the mainstream financial system, which is highly centralised and top-down. Central banks have been put in charge of money the state creates. Sovereign money is by law that which people use to settle any debts.

The US dollar accounts for over 80 per cent of total foreign currency trading and about half of global trade invoicing, which means that most foreign exchange is finally settled across the books of the Federal Reserve. The United States owes the rest of the world about US$16 trillion in net foreign exchange, so the Fed’s capacity to expand or decrease money supply has global power.

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