How Central Banks Think About Digital Currency
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How Central Banks Think About Digital Currency

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How Central Banks think about Digital Currency

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How Central Banks Think About Digital Currency

In the late 1600s, the introduction of bank notes changed the financial system forever. Fast forward to today, and another monumental change is expected to occur through central bank digital currencies (CBDC).

A CBDC adopts certain characteristics of everyday paper or coin currencies and cryptocurrency. It is expected to provide central banks and the monetary systems they govern a step towards modernizing.

But what exactly are CBDCs and how do they differ from money we use today?

The ABCs of CBDCs

To better understand a CBDC, it helps to first understand the taxonomy of money and its overlapping properties.

For example, the properties of cash are that it’s accessible, physical and digital, central bank issued, and token-based. Here’s how the taxonomy of money breaks down:

  • Accessibility: The accessibility of money is a big factor in determining its place within the taxonomy of money. For instance, cash and general purpose CBDCs are considered widely accessible.
  • Form: Is the money physical or digital? The form of money determines distribution and the potential for dilution, and future CBDCs issued will be completely digital.
  • Issuer: Where does the money come from? CBDCs are to be issued by the central bank and backed by their respective governments, which differs from cryptocurrencies which mostly have no government affiliations.
  • Technology: How does the currency work? CBDCs break down into token-based and account-based approaches. A token-based CBDC operates like banknotes today, where your information is not known nor needed by a cashier when accepting your payment. An account-based system, however, requires authorization to partake on the network, akin to paying with a digital wallet or card.

Digital Currency vs Digital Coins

In essence, digital currency is the electronic form of banknotes that exists today. Therefore, it’s viewed by some as a modern and efficient version of the cash you hold in your wallet or purse.

On the other hand, cryptocurrencies like Bitcoin are a store of value like gold that is secured by encryption. Cryptocurrencies are privately owned and fueled by blockchain technology, compared to digital currencies which do not use decentralized ledgers or blockchain technology.

Digital Currency: Regulatory Authority and Stability

Digital currencies are issued by a central bank, and therefore, are backed by the full power of a government. According to the Bank for International Settlements, over 20% of central banks surveyed say they have legal authority in issuing a CBDC. Almost 10% more said laws are currently being changed to allow for it.

As more central banks issue digital currencies, there’s likely to be favorability between them. This is similar to how a few currencies like the U.S. dollar and Euro dominate the currency landscape.

The Benefits of Issuing a CBDC

There are several positives regarding the issuance of a CBDC over other currencies.

First, the cost of retail payments in the U.S. is estimated to be between 0.5% and 0.9% of the country’s $20 trillion in GDP. Digital currencies can flow much more effectively between parties, helping reduce these transaction fees.

Second, large chunks of the global population are still considered unbanked. In this case, a CBDC opens avenues for people to access the global financial system without a bank. Even today, 6% of Americans do not have a single bank account.

Other motivations for a CBDC include:

  • Financial stability
  • Monetary policy implementation
  • Increased safety, efficiency, and robustness
  • Limit on illicit activity

An example of payments efficiency can be seen during the onset of the COVID-19 pandemic, when some Americans failed to receive their stimulus check. Altogether, some $2 billion in funds have gone unclaimed. A functioning rollout of a CBDC and a more direct relationship with citizens would minimize such a problem.

Status of CBDCs

Although widespread adoption of CBDCs is still far away, research and experiments are making notable strides forward:

  • 81 countries representing 90% of global GDP are exploring CBDCs.
  • The share of central banks actively engaging in CBDC work grew to 86% in the last 4 years.
  • 60% of central banks are conducting experiments on CBDCs (up from 42% in 2019) and 14% are moving forward to development and pilot arrangement.
  • The Bahamas is one of five countries currently working with a CBDC – the Bahamian Sand Dollar.
  • Sweden and Uruguay have shown interest in a digital currency. Sweden began testing an “e-krona” in 2020, and Uruguay announced tests to issue digital Uruguayan pesos as far back as 2017.
  • The People’s Bank of China has been running CBDC tests since April 2020. In all, tens of thousands of citizens have participated, spending 2 billion yuan, and the country is poised to be the first to fully launch a CBDC.

The U.K. central bank is less optimistic about a rolling out a CBDC in the near future. The proposed digital currency—dubbed “Britcoin”—is unlikely to arrive until at least 2025.

Disrupting The World of Money

Wherever you look, technology is disrupting finance and upending the status quo.

This can be seen through the rising market value of fintech firms, which in some cases are trumping traditional financial institutions in value. It is also evident in the rapid rise of Bitcoin to a $1 trillion market cap, making it the fastest asset to do so.

With the rollout of central bank digital currencies on the horizon, the next disruption of financial systems is already beginning.

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This Infographic Breaks Down Careers In Finance, From Hedge Funds to M&A

Corporate finance oversees trillions of dollars and makes modern markets and economies possible, but who are the main players?

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Careers In Corporate Finance, From Hedge Funds to M&A

Corporate finance is a key pillar on which modern markets and economies have been built. And this complex ecosystem consists of a number of important sectors, which can lead to lucrative career avenues.

From lending to investment banking, and private equity to hedge funds, the graphic above by Wall Street Prep breaks down the key finance careers and paths that people can take.

Let’s take a further look at the unique pieces of this finance ecosystem.

The Lending Business

Lending groups provide much needed capital to corporations, often in the form of term loans or revolvers. These can be part of short and long-term operations or for events less anticipated like the COVID-19 pandemic, which resulted in companies shoring up $222 billion in revolving lines of credit within the first month.

Investment Banking

Next, is investment banking, which can split into three main areas:

  1. Mergers and Acquisitions (M&A): There’s a lot of preparation and paperwork involved whenever corporations merge or make acquisitions. For that reason, this is a crucial service that investment banks provide, and its importance is reflected in the enormous fees recognized. The top five U.S. investment banks collect $10.2 billion in M&A advisory fees, representing 40% of the $25 billion in global M&A fees per year.
  2. Loan Syndications: Some $16 billion in loan syndication fees are collected annually by investment banks. Loan syndications are when multiple lenders fund one borrower, which can occur when the loan amount is too large or risky for one party to take on. The loan syndication agent is the financial institution involved that acts as the third party to oversee the transaction.
  3. Capital Markets: Capital markets are financial markets that bring buyers and sellers together to engage in transactions on assets. They split into debt capital markets (DCM) like bonds or fixed income securities and equity capital markets (ECM) (i.e. stocks). Some $41 billion is collected globally for the services associated with structuring and distributing stock and bond offerings.

The top investment banks generally all come from the U.S. and Western Europe, and includes the likes of Goldman Sachs and Credit Suisse.

Sell Side vs Buy Side

Thousands of analysts in corporate finance represent both the buy and sell-sides of the business, but what are the differences between them?

One important difference is in the groups they represent. Buy-side analysts usually work for institutions that buy securities directly, like hedge funds, while sell-side analysts represent institutions that make their money by selling or issuing securities, like investment banks.

According to Wall Street Prep, here’s how the assets of buy-side institutions compare:

Buy side institutionTotal assets
Mutual Funds, ETFs$21 trillion
Private equity$5 trillion
Hedge funds$3 trillion
Venture capital$0.5 trillion

Also, buy-side jobs appear to be more sought after across financial career forums.

Breaking Down The Buy Side

Mutual funds, ETFs, and hedge funds all generally invest in public markets.

But between them, there are still some differentiating factors. For starters, mutual funds are the largest entity, and have been around since 1924. Hedge funds didn’t come to life until around 1950 and for ETFs, this stretched to the 1990s.

Furthermore, hedge funds are strict in the clients they take on, with a preference for high net worth investors, and they often engage in sophisticated investment strategies like short selling. In contrast, ETFs, and mutual funds are widely available to the public and the vast bulk of them only deploy long strategies, which are those that expect the asset to rise in value.

Private equity (PE) and venture capital (VC) are groups that invest in private companies. Venture capital is technically a form of PE but tends to invest in new startup companies while private equity goes for more stable and mature companies with predictable cash flow patterns.

Who funds the buy side? The source of capital roughly breaks down as follows:

Source of capitalCapital amount
Individuals$112 trillion
Banks$51 trillion
Pension funds$34 trillion
Insurance Companies$24 trillion
Endowments$1.4 trillion

Endowment funds are foundations that invest the assets of nonprofit institutions like hospitals or universities. The assets are typically accumulated through donations, and withdrawals are made frequently to fund various parts of operations, including critical ones like research.

The largest university endowment belongs to Harvard with some $74 billion in assets under management. However, the largest endowment fund overall belongs to Ensign Peak Advisors. They represent The Church of Jesus Christ of Latter-day Saints (LDS), with some $124 billion in assets.

Primary Market vs Secondary Market

One of the primary motivations for a company to enter the public markets is to raise capital, where a slice of the company’s ownership is sold via an allotment of shares to new investors. The actual capital itself is raised in the primary market, which represents the first and initial transaction.

The secondary market represents transactions after the first. These are considered stocks that are already issued, and shares now fluctuate based on market forces.

Tying It All Together

As the infographic above shows, corporate finance branches out far and wide, handles trillions of dollars, and plays a key part in making modern markets and economies possible.

For those exploring a career in finance, the possibilities and avenues one can take are practically endless.

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Money

Visualizing the $94 Trillion World Economy in One Chart

Which countries and regions contribute the most to the world economy? In this infographic, we break down all $94 trillion of global GDP by country.

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World Economy

The $94 Trillion World Economy in One Chart

View the expanded version of this infographic.

Just four countries—the U.S., China, Japan, and Germany—make up over half of the world’s economic output by gross domestic product (GDP) in nominal terms. In fact, the GDP of the U.S. alone is greater than the combined GDP of 170 countries.

How do the different economies of the world compare? In this visualization we look at GDP by country in 2021, using data and estimates from the International Monetary Fund (IMF).

An Overview of GDP

GDP serves as a broad indicator for a country’s economic output. It measures the total market value of final goods and services produced in a country in a specific timeframe, such as a quarter or year. In addition, GDP also takes into consideration the output of services provided by the government, such as money spent on defense, healthcare, or education.

Generally speaking, when GDP is increasing in a country, it is a sign of greater economic activity that benefits workers and businesses (while the reverse is true for a decline).

The World Economy: Top 50 Countries

Who are the biggest contributors to the global economy? Here is the ranking of the 50 largest countries by GDP in 2021:

RankCountryGDP ($T)% of Global GDP
1🇺🇸 U.S.$22.924.4%
2🇨🇳 China$16.917.9%
3🇯🇵 Japan$5.15.4%
4🇩🇪 Germany$4.24.5%
5🇬🇧 UK$3.13.3%
6🇮🇳 India$2.93.1%
7🇫🇷 France$2.93.1%
8🇮🇹 Italy$2.12.3%
9🇨🇦 Canada$2.02.1%
10🇰🇷 Korea$1.81.9%
11🇷🇺 Russia$1.61.7%
12🇧🇷 Brazil$1.61.7%
13🇦🇺 Australia$1.61.7%
14🇪🇸 Spain$1.41.5%
15🇲🇽 Mexico$1.31.4%
16🇮🇩 Indonesia$1.21.2%
17🇮🇷 Iran$1.11.1%
18🇳🇱 Netherlands$1.01.1%
19🇸🇦 Saudi Arabia$0.80.9%
20🇨🇭 Switzerland$0.80.9%
21🇹🇷 Turkey$0.80.8%
22🇹🇼 Taiwan $0.80.8%
23🇵🇱 Poland$0.70.7%
24🇸🇪 Sweden$0.60.7%
25🇧🇪 Belgium$0.60.6%
26🇹🇭 Thailand$0.50.6%
27🇮🇪 Ireland$0.50.5%
28🇦🇹 Austria$0.50.5%
29🇳🇬 Nigeria$0.50.5%
30🇮🇱 Israel$0.50.5%
31🇦🇷 Argentina$0.50.5%
32🇳🇴 Norway$0.40.5%
33🇿🇦 South Africa$0.40.4%
34🇦🇪 UAE$0.40.4%
35🇩🇰 Denmark$0.40.4%
36🇪🇬 Egypt$0.40.4%
37🇵🇭 Philippines$0.40.4%
38🇸🇬 Singapore$0.40.4%
39🇲🇾 Malaysia$0.40.4%
40🇭🇰 Hong Kong SAR$0.40.4%
41🇻🇳 Vietnam$0.40.4%
42🇧🇩 Bangladesh$0.40.4%
43🇨🇱 Chile$0.30.4%
44🇨🇴 Colombia$0.30.3%
45🇫🇮 Finland$0.30.3%
46🇷🇴 Romania$0.30.3%
47🇨🇿 Czech Republic$0.30.3%
48🇵🇹 Portugal$0.30.3%
49🇵🇰 Pakistan$0.3*0.3%
50🇳🇿 New Zealand$0.20.3%

*2020 GDP (latest available) used where IMF estimates for 2021 were unavailable.

At $22.9 trillion, the U.S. GDP accounts for roughly 25% of the global economy, a share that has actually changed significantly over the last 60 years. The finance, insurance, and real estate ($4.7 trillion) industries add the most to the country’s economy, followed by professional and business services ($2.7 trillion) and government ($2.6 trillion).

China’s economy is second in nominal terms, hovering at near $17 trillion in GDP. It remains the largest manufacturer worldwide based on output with extensive production of steel, electronics, and robotics, among others.

The largest economy in Europe is Germany, which exports roughly 20% of the world’s motor vehicles. In 2019, overall trade equaled nearly 90% of the country’s GDP.

The World Economy: 50 Smallest Countries

On the other end of the spectrum are the world’s smallest economies by GDP, primarily developing and island nations.

With a GDP of $70 million, Tuvalu is the smallest economy in the world. Situated between Hawaii and Australia, the largest industry of this volcanic archipelago relies on territorial fishing rights.

In addition, the country earns significant revenue from its “.tv” web domain. Between 2011 and 2019, it earned $5 million annually from companies—including Amazon-owned Twitch to license the Twitch.tv domain name—equivalent to roughly 7% of the country’s GDP.

CountriesRegionGDP (B)
🇹🇻 TuvaluOceania$0.07
🇳🇷 NauruOceania$0.1
🇵🇼 PalauOceania$0.2
🇰🇮 KiribatiOceania$0.2
🇲🇭 Marshall IslandsOceania$0.2
🇫🇲 MicronesiaOceania$0.4
🇨🇰 Cook IslandsOceania$0.4*
🇹🇴 TongaOceania$0.5
🇸🇹 São Tomé and PríncipeAfrica$0.5
🇩🇲 DominicaCaribbean$0.6
🇻🇨 St. Vincent and the GrenadinesCaribbean$0.8
🇼🇸 SamoaOceania$0.8
🇰🇳 St. Kitts and NevisCaribbean$1.0
🇻🇺 VanuatuOceania$1.0
🇬🇩 GrenadaCaribbean$1.1
🇰🇲 ComorosAfrica$1.3
🇸🇨 SeychellesAfrica$1.3
🇦🇬 Antigua and BarbudaCaribbean$1.4
🇬🇼 Guinea-BissauAfrica$1.6
🇸🇧 Solomon IslandsOceania$1.7
🇹🇱 Timor-LesteAsia$1.7
🇱🇨 St. LuciaCaribbean$1.7
🇸🇲 San MarinoEurope$1.7
🇨🇻 Cabo VerdeAfrica$1.9
🇧🇿 BelizeCentral America$1.9
🇬🇲 GambiaAfrica$2.0
🇪🇷 EritreaAfrica$2.3
🇱🇸 LesothoAfrica$2.5
🇧🇹 BhutanAsia$2.5
🇨🇫 Central African RepublicAfrica$2.6
🇸🇷 SurinameSouth America$2.8
🇦🇼 ArubaCaribbean$2.9
🇧🇮 BurundiAfrica$3.2
🇦🇩 AndorraEurope$3.2
🇸🇸 South SudanAfrica$3.3
🇱🇷 LiberiaAfrica$3.4
🇩🇯 DjiboutiAfrica$3.7
🇸🇱 Sierra LeoneAfrica$4.4
🇸🇿 EswatiniAfrica$4.5
🇲🇻 MaldivesAsia$4.6
🇫🇯 FijiOceania$4.6
🇧🇧 BarbadosCaribbean$4.7
🇸🇴 SomaliaAfrica$5.4
🇲🇪 MontenegroEurope$5.5
🇱🇮 LiechtensteinEurope$6.8*
🇬🇾 GuyanaSouth America$7.4
🇲🇨 MonacoEurope$7.4*
🇹🇯 TajikistanAsia$8.1
🇰🇬 Kyrgyz RepublicAsia$8.2
🇹🇬 TogoAfrica$8.5

*2019 GDP (latest available) used where IMF estimates for 2021 were unavailable.

Like Tuvalu, many of the world’s smallest economies are in Oceania, including Nauru, Palau, and Kiribati. Additionally, several countries above rely on the tourism industry for over one-third of their employment.

The Fastest Growing Economies in the World in 2021

With 123% projected GDP growth, Libya’s economy is estimated to have the sharpest rise.

Oil is propelling its growth, with 1.2 million barrels being pumped in the country daily. Along with this, exports and a depressed currency are among the primary factors behind its recovery.

RankCountryRegion
2021 Real GDP Growth (Annual % Change)
1🇱🇾 Libya Africa123.2%
2🇬🇾 Guyana South America20.4%
3🇲🇴 Macao Asia20.4%
4🇲🇻 Maldives Asia18.9%
5🇮🇪 Ireland Europe13.0%
6🇦🇼 Aruba Caribbean12.8%
7🇵🇦 Panama Central America12.0%
8🇨🇱 Chile South America11.0%
9🇵🇪 PeruSouth America10.0%
10🇩🇴 Dominican RepublicCaribbean9.5%

Ireland’s economy, with a projected 13% real GDP growth, is being supported by the largest multinational corporations in the world. Facebook, TikTok, Google, Apple, and Pfizer all have their European headquarters in the country, which has a 12.5% corporate tax rate—or about half the global average. But these rates are set to change soon, as Ireland joined the OECD 15% minimum corporate tax rate agreement which was finalized in October 2021.

Macao’s economy bounced back after COVID-19 restrictions began to lift, but more storm clouds are on the horizon for the Chinese district. The CCP’s anti-corruption campaign and recent arrests could signal a more strained relationship between Mainland China and the world’s largest gambling hub.

Looking Ahead at the World’s GDP

The global GDP figure of $94 trillion may seem massive to us today, but such a total might seem much more modest in the future.

In 1970, the world economy was only about $3 trillion in GDP—or 30 times smaller than it is today. Over the next thirty years, the global economy is expected to more or less double again. By 2050, global GDP could total close to $180 trillion.

Correction: In earlier versions of this graphic, countries such as Vietnam and Pakistan were inadvertently not included in the visualization. They have now been added. In cases where the IMF has no data for 2021 (specifically Pakistan, Syria, Afghanistan, and Lebanon), the latest available data is used.

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