In recent years, we have witnessed the phenomenon of central banks launching their own digital currencies. Some examples include the Sand Dollar of Bahamas, e-CNY of China and e-krona of Sweden. This shift towards central bank digital currencies (CBDCs) is expected to intensify, as more countries launch their respective digital currencies. Around 100 countries including most G20 nations are actively thinking about launching their digital currencies.

As central bank digital currencies are a relatively new phenomenon, at least in public domain, it makes us wonder why countries have developed an interest in digital currency. Is central bank digital currency same as cryptocurrency? To answer such questions, here’s a look at key reasons why central banks are launching digital currency.

Ease of payment – The concept of central bank digital currency may seem entirely new. But it has existed earlier also. Much of the reserves maintained by central banks is in digital form. However, these are only utilized by other banks and financial institutions. Central bank digital currency is slightly different, as it can be used by everyone including individuals. Digital currency will simplify everyday payments, as they will be able to function even without internet access.

Reduce cash circulation – It is common knowledge that much of the criminal activities are financed through cash. Also, printing cash is a significant cost burden for central banks. As more and more people start using digital currency, the amount of currency notes to be printed will reduce dramatically. The eventual aim is apparently to shift entirely to digital transactions. However, this may take several years to achieve.

Fighting counterfeits – When money gets into the wrong hands, bad things are bound to happen. Counterfeiting is a big problem, with millions of dollars in circulation around the globe. Every country faces the problem of counterfeiting. Counterfeit currency can be used for various nefarious purposes such as crime, creating social unrest, anti-national activities, etc. With a greater share of digital currency, the problem of counterfeits can be minimized.

Reduce money laundering and financial fraud – With digital currency, it will become a lot harder to launder money that is usually earned illegally and without paying the necessary taxes. The risk of financial frauds will also decrease with digital currency.

Is central bank digital currency same as cryptocurrency?

There is a tendency to confuse central bank digital currency (CBDCs) with cryptocurrencies like Bitcoin, Ethereum, Tether, etc. However, the fact is that CBDCs have no relation to cryptocurrency. As compared to a cryptocurrency whose value may increase or decrease based on demand, the value of CBDCs will always remain equal to the respective amount in actual currency. Another difference is that while cryptocurrencies are privately owned, CBDCs are owned and managed by respective central banks.

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An international financial institution, World Bank primarily focuses on providing funds and grants to countries for executing capital projects. The financial assistance is provided to low- and middle-income countries. The World Bank comprises five institutions, which are IBRD (The International Bank for Reconstruction and Development), IDA (The International Development Association), IFC (The International Finance Corporation), MIGA (The Multilateral Investment Guarantee Agency) and ICSID (The International Centre for Settlement of Investment Disputes).

While most people have a basic idea about what World Bank is, there is not much clarity on how World Bank generates its own funds. For better understanding, here’s a look at who funds World Bank.

Financial Markets

Through the International Bank for Reconstruction and Development (IBRD), the World Bank taps the world’s financial markets to raise most of its funds. IBRD has the primary mission of providing loans, guarantees, advisory services and risk management products to middle income as well as creditworthy low-income countries.

Till date, more than $500 billion worth of loans have been provided by IBRD to alleviate poverty across the globe. IBRD has consistently maintained high credit rating, which allows the organization to borrow funds from the world’s financial markets at low cost. IBRD also generates funds via its equity investments and the small margin that is earned via lending to countries.

Donor countries

Through the International Development Association (IDA), the World Bank raises funds through donations from member countries. Much of the funds are generated through donations by developed countries. Some of the largest donations are received by countries such as United States, Japan, United Kingdom, France, Germany, Canada, China, Italy, Netherlands, Sweden, Saudi Arabia and Switzerland.

Bonds

World Bank issues bonds, something similar to the general practice associated with corporates and central banks. World Bank can easily issue bonds to raise funds, as the organization has consistently maintained triple-A credit rating. This is the highest credit rating for any organization. World Bank bonds are usually purchased by member countries and private sector institutions.

World Bank bonds are among the safest investment options for nations and private organizations. World Bank bonds can be purchased from commercial banks, security houses, dealers and brokers. Bonds issued by World Bank are broadly classified as benchmark and global bonds, local currency bonds, structured notes and USD discount notes.

Investment of undisbursed loans

Every year, there’s a specific portion of available funds that is not disbursed. This balance is invested to earn income. It is then used to meet operational expenses of World Bank’s Washington headquarters and regional offices.

Repayment

When borrowing countries repay their principal, it becomes part of total funds available with World Bank. These funds are automatically allocated as available funds for any upcoming projects.

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The basic concept of banking has been in existence since several centuries when people did not even use money. It all started when the world traded with the barter system and a few merchants started giving grain loans to farmers.

Modern day banking system developed in the 14th century, when several banking establishments started operating in Europe. Since then, banks have become a lot more complex and acquired several new roles. Based on assets under management, here’s a quick look at top five largest banks in the world.

Industrial and Commercial Bank of China – Founded in 1984 as a limited company, Industrial and Commercial Bank of China (ICBC) is currently a state-owned commercial bank with global operations. Part of the bankº£½ÇÖ±²¥ capital has been sourced through the Ministry of Finance of China. The bank has branches across Asia, Africa, Latin America, Europe, America and Australia. ICBC currently has assets worth USD 4,324.27 billion.

China Construction Bank – Founded in 1954, China Construction Bank (CCB) was earlier known as People’s Construction Bank of China. It got its new name in 1996. While it has thousands of braches in its home country, CCB also has operations across major cities in European countries, USA, Australia, South Korea, and Japan. As of 2020, it has USD 3,653.11 billion worth of assets under management.

Agricultural Bank of China – Also referred to as AgBank, Agricultural Bank of China (ABC) started operations way back in 1951. Just like other large Chinese banks, ABC also has global operations. It is a public limited company, with its shares listed on Shanghai Stock Exchange and Hong Kong Stock Exchange. ABC currently manages assets worth USD 3,572.98 billion.

Bank of China – More than a century old, Bank of China started operations in 1912. In addition to its local network, Bank of China has branches in more than 27 countries. Even though it is not a central bank, Bank of China has been given the license to issue banknotes in Hong Kong and Macau region. Total assets under management are worth USD 3,270.15 billion.

Mitsubishi UFJ Financial Group – Based in Tokyo, Japan, Mitsubishi UFJ Financial Group (MUFG) came into existence in 2005 post the merger of Mitsubishi Tokyo Financial Group (MTFG) and UFJ Holdings. MUFG is currently one of the primary revenue generators for Mitsubishi Group. As of 2020, MUFG has USD 2,892.97 billion worth of assets under management.

As is evident from above, China is continuously strengthening its banking system with the goal to dominate the global financial system. It’s obvious that China wants to be the global superpower and it will need its banks to make it possible. China is also expected to match the military prowess of United States by 2027. As things stands now, it appears that China is all set to dominate the 21st century.

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