Global: Qatar Central Bank Pilots Digital Currency Initiative

As digital currencies become increasingly inevitable, central banks around the world are exploring their own versions to stay ahead of the curve. But what are the potential benefits and risks associated with such a move?

Cryptocurrencies are often viewed as the renegades of the financial world: unregulated, highly speculative, and sometimes used by criminal organizations. Despite these concerns, many central banks, including the International Monetary Fund (IMF), are investigating the potential of digital currencies.

The digital revolution is transforming the financial landscape, and like any technology, digital currencies can be beneficial or detrimental depending on their use and the regulatory framework governing them. While only three countries have fully implemented a digital currency, 134 nations are currently researching or considering this innovation, particularly for retail and high-value transactions.

In mid-June, Sheikh Ahmed bin Khalid al-Thani, Assistant Governor for Financial Instruments and Payment Systems at QCB, announced that their digital currency pilot project would involve both the central bank and participating banks in trials focused on high-value payments. Four key uses of digital currency at the wholesale level will be explored:

1. Settling interbank payments: Assessing whether digital currency can enhance efficiency and reduce risks.
2. Purchasing securities: Using digital currency for buying securities.
3. Trading securities: Facilitating the sale and trading of securities between banks using digital currency.
4. Predicting liquidity levels: Utilizing artificial intelligence to deepen QCB’s understanding of the risks associated with digital currency.

The digital accounts will be created by transferring Riyals to them at a 1:1 ratio. Most financial transactions today are already digital, and conventional currencies are no longer tied to physical assets like gold. Digital currencies differ mainly in that they enable direct device-to-device transactions, bypassing the traditional banking system. This has the potential to speed up and increase the efficiency of retail and commercial financial activities, and to promote financial inclusion for those without bank accounts. However, this also presents regulatory challenges since transactions occur outside the traditional banking infrastructure.

The IMF has published a CBDC (Central Bank Digital Currency) Virtual Handbook, providing a reference guide for policymakers and central bank specialists. This handbook, which began with five chapters in November 2023 and aims to reach 20 chapters by 2026, offers guidance on best practices and knowledge sharing.

The impact of CBDCs on monetary policy is still uncertain and highly context-dependent. While increased competition for bank deposits, higher wholesale funding, and reduced bank profits could tighten financial conditions, greater financial inclusion might have a loosening effect. In countries like Qatar, where most people already have bank accounts, the impact might be minimal.

Many countries considering a CBDC are likely to impose limits on transactions and holdings. The IMF warns that the effectiveness of national monetary policies may decline as the use of cryptocurrencies and foreign-issued CBDCs increases. This “currency substitution” problem is already affecting some emerging economies. A CBDC could potentially counteract this issue by offering a safe, domestic alternative to foreign currencies.

An official digital currency could also enable targeted monetary policy through direct transfers during emergencies, such as natural disasters. Although no current CBDC plans to be interest-bearing, it remains a theoretical possibility. Even without bearing interest, a digital currency could serve as a safe haven during financial crises, such as bank runs or periods of low interest rates and rising inflation.

The IMF emphasizes the need for robust technological infrastructure, governance, institutional strength, and quality human resources to support a CBDC. Cybersecurity and data protection are critical concerns.

The IMF’s guidance includes practical advice on piloting and testing a CBDC. While the potential benefits of central banks developing digital currencies are significant, careful attention must be paid to design, policy, governance, and legal issues. Given the complexity of these dynamics, pilot projects are essential for learning and refinement before full implementation.