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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Personal Finance

Mapped: The Salary You Need to Buy a Home in 50 U.S. Cities

Is owning a home still realistic? This map lays out the salary you’d need to buy a home in 50 different U.S. metro areas.

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This is the Salary You Need to Buy a Home in 50 U.S. Cities

Depending on where you live, owning a home may seem like a far off dream or it could be fairly realistic. In New York City, for example, a person needs to be making at least six figures to buy a home, but in Cleveland you could do it with just over $45,000 a year.

This visual, using data from Home Sweet Home, maps out the annual salary you’d need for home ownership in 50 different U.S. cities.

Note: The map above refers to entire metro areas and uses Q1 2022 data on median home prices. The necessary salary was calculated by the source, looking at the base cost of principal, interest, property tax, and homeowner’s insurance.

Home Ownership Across the U.S.

San Jose is by far the most expensive city when it comes to purchasing a home. A person would need to earn over $330,000 annually to pay off the mortgage at a monthly rate of $7,718.

Here’s a closer look at the numbers:

RankMetro AreaMedian Home PriceSalary Needed
#1San Jose$1,875,000$330,758
#2San Francisco$1,380,000$249,685
#3San Diego$905,000$166,828
#4Los Angeles$792,500$149,127
#5Seattle$746,200$140,768
#6Boston$639,000$130,203
#7New York City$578,100$129,459
#8Denver$662,200$121,888
#9Austin$540,700$114,679
#10Washington, D.C.$553,000$110,327
#11Portland$570,500$109,267
#12Riverside/San Bernardino$560,000$106,192
#13Sacramento$545,000$105,934
#14Miami$530,000$103,744
#15Salt Lake City$556,900$100,970
#16Providence$406,700$88,477
#17Phoenix$474,500$86,295
#18Las Vegas$461,100$84,116
#19Raleigh$439,100$83,561
#20Dallas$365,400$81,165
#21Orlando$399,900$79,573
#22Chicago$325,400$76,463
#23Tampa$379,900$75,416
#24Houston$330,800$74,673
#25Minneapolis$355,800$74,145
#26Baltimore$350,900$73,803
#27Nashville$387,200$73,502
#28Jacksonville$365,900$73,465
#29Hartford$291,000$73,165
#30Charlotte$379,900$72,348
#31San Antonio$321,100$70,901
#32Atlanta$350,300$69,619
#33Philadelphia$297,900$69,569
#34Richmond$354,500$68,629
#35Milwaukee$298,800$65,922
#36Kansas City$287,400$60,507
#37Columbus$274,300$59,321
#38Virginia Beach$289,900$59,245
#39New Orleans$281,100$57,853
#40Birmingham$289,500$55,662
#41Indianapolis$271,600$53,586
#42Memphis$259,300$52,691
#43Cincinnati$244,300$51,840
#44Buffalo$202,300$51,525
#45Detroit$224,300$50,302
#46St Louis$216,700$48,988
#47Louisville$235,400$48,121
#48Cleveland$192,700$45,448
#49Oklahoma City$198,200$45,299
#50Pittsburgh$185,700$42,858

Perhaps surprisingly, Boston residents need slightly higher earnings than New Yorkers to buy a home. The same is also true in Seattle and Los Angeles. Meanwhile, some of the cheapest cities to start buying up real estate in are Oklahoma City and Cleveland.

As of April, the rate of home ownership in the U.S. is 65%. This number represents the share of homes that are occupied by the owner, rather than rented out or vacant.

The American Dream Home

As of the time of this data (Q1 2022), the national yearly fixed mortgage rate sat at 4% and median home price at $368,200. This put the salary needed to buy a home at almost $76,000⁠—the median national household income falls almost $9,000 below that.

But what kind of homes are people looking to purchase? Depending on where you live the type of home and square footage you can get will be very different.

In New York City, for example, there are fairly few stand-alone, single-family houses in the traditional sense⁠—only around 4,000 are ever on the market. People in the Big Apple tend to buy condominiums or multi-family units.

Additionally, if you’re looking for luxury, not even seven figures will get you much in the big cities. In Miami, a million dollars will only buy you 833 square feet of prime real estate.

One thing is for sure: the typical American dream home of the big house with a yard and white picket fence is more attainable in smaller metro areas with ample suburbs.

Buying vs. Renting

The U.S. median household income is $67,500, meaning that today the typical family could only afford a home in about 15 of the 50 metro areas highlighted above, including New Orleans, Buffalo, and Indianapolis.

With the income gap widening in the U.S., the rental market remains a more attractive option for many, especially as prices are finally tapering off. The national median rent price was down nearly 3% from June to July for two-bedroom apartments.

At the end of the day, buying a home can be an important investment and may provide a sense of security, but it will be much easier to do in certain types of cities.

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Investor Education

Countries with the Highest Default Risk in 2022

In this infographic, we examine new data that ranks the top 25 countries by their default risk.

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Countries with the Highest Default Risk in 2022

In May 2022, the South Asian nation of Sri Lanka defaulted on its debt for the first time. The country’s government was given a 30-day grace period to cover $78 million in unpaid interest, but ultimately failed to pay.

Not only does this impact Sri Lanka’s economic future, but it also raises an important question: which other countries are at risk of default?

To find out, we’ve used data from Bloomberg to rank the countries with the highest default risk.

The Sovereign Debt Vulnerability Ranking

Bloomberg’s Sovereign Debt Vulnerability Ranking is a composite measure of a country’s default risk. It’s based on four underlying metrics:

  • Government bond yields (the weighted-average yield of the country’s dollar bonds)
  • 5-year credit default swap (CDS) spread
  • Interest expense as a percentage of GDP
  • Government debt as a percentage of GDP

To better understand this ranking, let’s focus on Ukraine and El Salvador as examples.

CountryRankGovernment Bond
Yield (%)
5Y CDS SpreadInterest Expense
(% of GDP)
Government Debt
(% of GDP)
🇸🇻 El Salvador131.8%3,376 bps
(33.76%)
4.9%82.6%
🇺🇦 Ukraine860.4%10,856 bps
(100.85%)
2.9%49%

1 basis point (bps) = 0.01%

Why are Ukraine’s Bond Yields so High?

Ukraine has high default risk due to its ongoing conflict with Russia. To understand why, consider a scenario where Russia was to assume control of the country. If this happened, it’s possible that Ukraine’s existing debt obligations will never be repaid.

That scenario has prompted a sell-off of Ukrainian government bonds, pushing their value down to nearly 30 cents on the dollar. This means that a bond with face value of $100 could be purchased for $30.

Because yields move in the opposite direction of price, the average yield on these bonds has climbed to a very high 60.4%. As a point of comparison, the yield on a U.S. 10-year government bond is currently 2.9%.

What is a CDS Spread?

Credit default swaps (CDS) are a type of derivative (financial contract) that provides a lender with insurance in the event of a default. The seller of the CDS represents a third party between the lender (investors) and borrower (in this case, governments).

In exchange for receiving coverage, the buyer of a CDS pays a fee known as the spread, which is expressed in basis points (bps). If a CDS has a spread of 300 bps (3%), this means that to insure $100 in debt, the investor must pay $3 per year.

Applying this to Ukraine’s 5-year CDS spread of 10,856 bps (108.56%), an investor would need to pay $108.56 each year to insure $100 in debt. This suggests that the market has very little faith in Ukraine’s ability to avoid default.

Why is El Salvador Ranked Higher?

Despite having lower values in the two metrics discussed above, El Salvador ranks higher than Ukraine because of its larger interest expense and total government debt.

According to the data above, El Salvador has annual interest payments equal to 4.9% of its GDP, which is relatively high. Comparing to the U.S. once more, America’s federal interest costs amounted to 1.6% of GDP in 2020.

When totaled, El Salvador’s outstanding debts are equal to 82.6% of GDP. This is considered high by historical standards, but today it’s actually quite normal.

The next date to watch will be January 2023, as this is when the country’s $800 million sovereign bond reaches maturity. Recent research suggests that if El Salvador were to default, it would experience significant, yet temporary, negative effects.

Another Hot Topic for El Salvador: Bitcoin

In September 2021, El Salvador became the first country in the world to adopt bitcoin as legal tender. This means that Bitcoin is recognized by law as a means to settle debts and other obligations.

The International Monetary Fund (IMF) criticized this decision in early 2022, urging the country to revoke legal tender status. In hindsight, these warnings were wise, as Bitcoin’s value has fallen by 56% year-to-date.

While this isn’t directly related to El Salvador’s default risk, it does open potential avenues for relief. For instance, large players in the crypto space may be willing to assist the government to keep the concept of “nation-state bitcoin adoption” alive.

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