Digital currency explained

The Bank of Mexico (Banxico) announced that in 2024 it could issue a digital currency. What does it mean.

The first thing to know is that there is the Digital Currency of a Central Bank, such as the Banxico proposal, and private cryptocurrencies such as Bitcoin, Ether or Dogecoin.

The latter emerged as a way to circumvent governments. The founding entity of Bitcoin in 2008 after the financial crisis, called Satoshi Nakamoto, explained that the cryptocurrency was “a new electronic cash system”, “completely decentralized without a server or central authority.”

Central bank digital currencies are official electronic money. It is the virtual version of bank notes and coins and they have exactly the same value. A physical currency of one peso is equivalent and has the same value as a digital peso and can buy the same as a physical coin or ticket, unlike a bitcoin that today has a price of 863 thousand 771.61 pesos today.

For more clarity, a digital currency of a central bank is fiat money, that is, issued and regulated by the government, legal and reliable (trust means trust), risk-free, exchangeable in the market, depositable in private banks through means electronic and recognized in international agreements.

It must be remembered that historically the State has the exclusive function of minting coins and issuing banknotes through the central bank. In Mexico, the entities of the Republic cannot do so in any case. Salaries must be paid in legal tender and cannot be substituted for merchandise, vouchers or tokens. Paying a salary with bitcoin is illegal.

When cryptocurrencies emerged, governments were alarmed because they lost their monopoly on the issuance of currency and recalled times when private entities issued their own currency. This “loss” of the exclusive function of minting coins and issuing banknotes – now on the Internet – has fostered the acceptance and interest of central banks in issuing their own digital currency.

While notes and coins are kept in bank safes (or under the mattress), digital currencies are software and are preserved in electronic ledgers within the central bank, distributed electronically for private banks to have. access remotely, using blockchain technology under the principles of interoperability by protocol and programming by design.

Digital currencies have several advantages: it is a new technology, it is a state-of-the-art payment infrastructure and it allows progress in financial inclusion, in addition to “recovering” that exclusive function of the State of issuing legal currency.

Indeed, an official Internet intermediation platform is required to make and receive deposits and one of its greatest benefits is that it contributes to financial inclusion in populations without or with insufficient access to banking services. Local and cross-border transactions are fast, immediate and cheap. Being electronic money, it is also easily traceable, which is why virtual currency contributes to fighting tax evasion, money laundering, illegal financing and corruption.

Central bank digital currencies also have their dark side: concerns about the privacy of users, the intrusion of their personal data, the tracking of purchases of legal or illegal goods or services, knowing the accumulated savings, the marketing opportunity. for the advertisers and the problems that it could cause in terms of reputation and image of the people by the transactions that they carry out, reason why the “pseudonymity” should be guaranteed.

Why until 2024 and not before? Because it is necessary to open the debate; prepare the legal framework; the legal recognition of digital currency; financial preparation and adaptation; define logistics; develop the technological platform, including the official digital wallet and mobile application available to the population; information campaigns and user literacy, not to mention the acceptance of the population to the digital currency.

A period of adaptation is also required, because physical coins and bills will not disappear overnight. Although it is true that more and more people use less cash and increasingly resort to cards and mobile payments through apps and digital platforms.

A Banxico survey on means of payment before and during the pandemic revealed that 86% of the population used cash, when before the pandemic the percentage was 93%. The use of credit and debit cards was 11 and 26%, respectively, but before confinement it was 14 and 28% in each case. The payment method with the highest growth during the pandemic was transfers by SPEI (Interbank Electronic Payment System), which grew to 4% of the population when before the Covid-19 it was only 0.5%.

The digital currency could mean the disruptive transformation of Banxico itself, because by issuing the digital peso, making the technological platform available to the public, allowing money to circulate, be exchanged and transferred electronically and interact with consumers, Banxico would be becoming in a competitor banker of private banks, instead of just regulating and supervising the monetary and banking system as before.

Another challenge is that the use and exchange of physical coins and bills does not require interfaces such as a terminal device (smartphone or computer), Internet connection and a digital platform. That means that seriously implementing a central bank digital currency requires a robust telecommunications infrastructure, guaranteeing universal Internet service, access to Information and Communication Technologies (ICT) and cybersecurity, unresolved situations in the country.

Banxico’s digital currency is an irreversible step in Mexico’s digitization process. Its planning requires multiple stages, guaranteeing conditions, a lot of collaboration and reaching intersectoral and international agreements. Like everything on the Internet, the digital currency will also be disruptive: it will destroy many things such as the way of having and using money and will build new ones such as accepting total control from the government over what is bought, sold, saved, exchanged …

President of the Mexican Association for the Right to Information (Amedi)

In communication

Media and telecommunications analyst and academic at UNAM. Study the media, new technologies, telecommunications, political communication and journalism. He is the author of the book The media presidentialism. Media and power during the government of Vicente Fox.