Central banks around the world have begun exploring CBDCs as a response to declining cash usage. Some smaller nations like the Bahamas and Eastern Caribbean have adopted CBDCs like DCash while larger countries like Sweden and China have performed research and conducted pilot projects for them.
CBDCs can help enhance the payments landscape by creating competition, resilience, efficiency, and controls in domestic payment systems. They may also lower cross-border transaction costs and promote financial inclusion.
What is a CBDC?
CBDCs (Central Bank Digital Currencies) are digital currencies issued by central banks designed to replace cash payments and offer more convenient ways of paying. Furthermore, CBDCs may increase resilience of payment systems, promote financial inclusion and help countries reduce currency substitution (when additional currencies are used alongside their native one).
CBDC proponents claim that its benefits are numerous, including lower transaction costs, faster payments, greater access to finance and greater security. Unfortunately, such claims don’t hold up under scrutiny as CBDCs pose significant threats to financial privacy, economic freedom and free markets.
CBDCs can be held by private individuals as electronic tokens that they store on smartphones, prepaid cards or in online wallets. A CBDC issued by a central bank can also be used for payments or transferring funds between accounts; wholesale CBDCs could then be distributed among financial institutions like high-street banks.
The central bank records transactions using CBDCs on its own digital ledger and can intervene to maintain smooth functioning of the monetary system if an external provider collapses. It can also monitor and verify anyone seeking to use digital money; as it must comply with laws against money laundering and financing of terrorism – just as financial institutions must verify identities today.
Differences Between CBDCs and Cryptocurrencies
CBDCs, also known as central bank digital currencies (CBCs), are managed and controlled by central banks. Cryptocurrencies operate as decentralized network of computers which process transactions on a blockchain ledger; CBDCs don’t offer users any anonymity due to being tracked by governments via wallet addresses.
Motivations for issuing CBDCs vary according to country, but typically include: lowering transaction costs; promoting financial inclusion by providing easier and safer access to money through mobile channels; increasing competition in payments landscape and supporting innovation; building resilience in domestic markets by expeditious dispersing of monetary policy quickly and efficiently; and helping facilitate cross-border remittances.
CBDCs offer many advantages; however, they also present several drawbacks. Most prominently is their non-anonymity which could compromise user data security. Furthermore, their geographical restriction means they can only be used within their issuing country’s boundaries; this limits potential new investments opportunities and decreases consumer savings demand.
CBDCs represent an exciting development in the payments ecosystem, so commercial banks need to remain aware of CBDC developments and understand how they may help meet their goals – including optimizing payments infrastructure to enable interoperability with these new services, taking advantage of any opportunities they present and anticipating potential changes they will bring to the market.
e-Peso, the central bank’s version of digital money, is a token-based CBDC that allows direct transfers between people without needing internet connectivity – similar to how M-PESA, used by millions in Kenyan, operates.
In November 2017, e-Peso pilot plan was officially introduced with a six-month test phase and set out to increase financial inclusion in countries with low bank penetration. While its purpose wasn’t meant to compete directly with credit or debit cards, e-Peso could provide people with an accessible alternative that is both convenient and fast to use.
This model differs significantly from the blockchain-based CBDCs promoted by crypto enthusiasts. While blockchain technology provides secure transactions storage and verification, e-Peso was designed to operate autonomously of internet connections by managing user digital wallets linked directly to telephone numbers for instant payments as well as security features that prevent double spending or fraud.
A federally controlled CBDC would bring radical ideology and ESG concerns directly into American economic life, imperilling privacy and free markets; its costs far outweigh their supposed advantages; we shouldn’t allow Davos elites to inject ideological nonsense into banking system through backdoor dealing.
Contrary to the other CBDCs listed here, e-CNY is supported by commercial bank liabilities held as assets on institutions’ balance sheets. This makes the e-CNY less risky for banks while restricting its potential usage as an everyday payment form.
The People’s Bank of China (PBOC) has been testing an electronic Chinese Yuan (e-CNY), although its development remains at an early stage. If successful, however, its introduction could undermine incumbent payment platforms while potentially helping China circumvent US sanctions aimed at financial institutions that facilitate transactions between sanctioned individuals and China.
To that end, the People’s Bank of China has developed a system for disseminating e-CNY via private banks. Speaking at an Atlantic Council panel discussion, Mu explained how this arrangement will preserve private sector technology and operational prowess while still permitting central bank oversight of the network. He further noted how users could make offline transactions using mobile phones or plastic cards with e-ink displays.
Additionally, the People’s Bank of China has begun working with rural credit banks to create a single access point for China’s thousands of rural financial institutions to access e-CNY services aggregation services like Alipay and WeChat Pay that have already gained prominence within major urban centres in China. This initiative could assist Beijing in expanding the use of e-CNY outside major urban centers where these two services have already established themselves as leading players.