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Visa and ConsenSys Team Up To Develop Technology For Digital Currencies Issued By Central Banks

On Thursday, Visa (V) announced that it would take its crypto services to the next level by teaming with blockchain software company ConsenSys to create a central bank digital currency on-ramp.

The payments giant plans to launch a “CBDC sandbox” in the spring, where central banks can try out the technology after minting it on ConsenSys’ Quorum network.

Stepping Forward To Expand Cryptocurrency Market

The collaboration is the latest step in the expanding cryptocurrency market, which has seen central banks compete to produce their digital coins and big financial institutions dabble in cryptocurrency payments.

CBDBs can be powered by blockchain or distributed ledger technologies. CBDC protocols, unlike cryptocurrencies like bitcoin (BTC-USD) and ether (ETH-USD), are always “permission,” which means central banks retain monetary and governance authority.

For CBDCs, the partnership implements a “two-tier” distribution mechanism. Central banks would construct their digital currency using Consensys’ Quorum platform to determine the currency’s monetary and governance principles. Using Visa’s infrastructure, they then distribute the currency through financial intermediaries such as commercial banks.

Eswar Prasad Highlights Some Benefits Of Visa-ConsenSys Concept

Some of the benefits of the Visa-Consensys concept were highlighted to Yahoo Finance by Eswar Prasad, a senior professor of trade policy at Cornell University and author of “The Future of Money.” It does not eliminate payment providers from the equation, and it may encourage competition to see who can provide more efficient and low-cost solutions.

Central banks, according to Prasad, will almost certainly opt to run their payment infrastructure.

However, he added that Visa’s strategy is notable because it might “help maintain the relevance of its payment network amidst fast-moving changes in the payment space that could undercut its business model.” Stablecoins and various fintech payment systems are also among the changes.

Since 2019, Visa has been working on crypto-related items, leveraging its current payment network to create “on-ramps” for buying crypto and “off-ramps” for converting it back to fiat currency.

It already uses a single stablecoin to settle transactions and has just launched a crypto consultancy service for banks interested in pursuing their cryptocurrency initiatives.

In the last year and a half, the number of countries looking into CBDCs has nearly doubled. At least 87 countries, accounting for 90 percent of global GDP, are contemplating financial technology in some way, according to the Atlantic Council’s CBDC tracker.

A CBDC has been established by nine central banks, including Nigeria, the Bahamas, and seven additional Caribbean nations. However, within that group, progress and goals have been inconsistent. Meanwhile, next month, China is preparing to introduce its prototype digital yuan to international tourists for the 2022 Winter Olympics.

Like the Federal Reserve, major central banks are unlikely to release a digital coin anytime soon. Fed Chair Jerome Powell indicated during his re-confirmation hearing earlier this week that the Fed’s long-awaited report on CBDCs will be released “in the coming weeks.” Still, he didn’t give a specific timeline.

In October, a top executive at eCurrency, a firm that has advised the US Treasury and the Federal Reserve on CBDCs for more than a decade, told Yahoo Finance that the Fed and US Treasury need congressional approval before issuing a central bank-backed token.

CBDBs have a wide range of applications. However, Visa’s global CBDC lead Catherine Gu told Yahoo Finance that two primary factors stand out based on interactions with central bankers.

To begin with, developing countries may leverage technology to provide financial access to previously unbanked populations. Second, CBDCs allow industrialized countries to more efficiently provide stimulus assistance in more focused ways to stimulate an economy by giving the money an expiration date or limiting its usage to specific transactions.

However, there is a barrier to CBDC adoption and acceptance among users. It all depends on how much authority the technology gives central banks — and whether that threatens the supremacy of fiat currencies like the US dollar, the world’s most widely used reserve currency.

While CBDCs may bring new monetary policy tools, it is unclear how democratic countries will set limits.

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