Central bank digital currencies (CBDCs) represent a new digital form of national money. Their use has seen increased attention due to private stablecoins, China’s e-CNY pilot project, and COVID-19 pandemic outbreak.
Wholesale CBDC can enhance payment and security settlement speed while decreasing liquidity and counterparty risk, and make government functions and monetary policy implementation more manageable.
Central bank digital currencies (CBDCs) are a type of digital money issued directly by a country’s central bank rather than being issued by commercial banks or e-money issuers, thus eliminating their associated credit risk and providing greater trust between consumers and businesses alike.
CBDCs provide innovative new ways of managing economies – stimulus payments and other benefits could be sent directly to citizens’ accounts for example–while also supporting financial inclusion by offering an inexpensive way for consumers and businesses alike to access national currency directly. They can reduce infrastructure costs by enabling direct payment between consumers and businesses without intermediaries or central settlement systems facilitating transactions between each other directly.
efforts to develop CBDCs are increasing globally. A recent survey by Banking International Settlements (BIS) revealed that nearly all central banks are currently investigating or testing out CBDCs, while more than half have already begun actual trials. Many central banks, however, remain uncertain as to which design would best fit their CBDC – one which provides more economic advantages than costs and risks while not replacing existing forms of money and financial services; plus address privacy concerns associated with CBDCs – yet many remain unsuccessful at creating one that works.
COVID-19 pandemic, digital payments and blockchain’s increasing popularity has reignited interest in CBDCs across many countries, prompting many central banks to explore them once again. Their motivations vary; some central banks wish to reduce cash management costs within their regions while simultaneously improving financial inclusion by offering easier access to unbanked populations and strengthening competition and resilience within domestic payment systems. Others may seek greater transparency of money flows for improved programmability of money transfers.
CBDCs could revolutionise payment services and offer an alternative to physical cash. But privacy issues could create barriers to voluntary adoption: some fear allowing governmental snooping; while others worry that the technology might fail.
CBDCs will likely raise commercial bank funding costs, due to competition with zero-interest Fed deposits and cyberattacks on banking systems. While these risks could be balanced out by increased transparency and programmability benefits, faster and easier payment solutions already exist in the private sector, such as Venmo or Square which drastically lower transaction costs while facilitating cross-border transfers.
Central banks have become more interested in CBDCs due to declining cash usage. Implementation can present difficulties; one being that if their CBDC relies on distributed ledger technology (e.g. Nigeria’s eNaira or China’s e-CNY), security would depend on third parties that the bank cannot control for reliability purposes.
CBDCs must also integrate seamlessly with existing payments infrastructure, which may involve integration into financial systems operating under various legal and regulatory regimes. This can prove challenging as new decision-making processes and change management capabilities may need to be established along with talent adept in forging partnerships.
CBDCs pose cybersecurity threats. Hackers continue to attack financial systems and personal data; insiders use their access privileges to steal assets; nation states will seek espionage against rivals via cyber attacks; therefore a CBDC must implement robust information security programs in order to shield itself against these dangers.
Finally, CBDCs must balance the competing objectives of monetary sovereignty and full convertibility between their digital currency and commercial bank money. For instance, if a CBDC issued by a foreign central bank was to enter domestic banks’ reserve accounts (Auer and Boehme 2021), disintermediation might become easier in domestic economies due to this requirement (Auer and Boehme 2021). This would reduce domestic disintermediation risk.
As cashless transactions increase, central banks are searching for innovative solutions. One such avenue is CBDCs (Central Bank Digital Currencies). CBDCs are virtual money backed by government, and are becoming more common as an innovative form of currency replacement. Apart from simply replacing paper money with virtual ones, CBDCs also promote financial inclusion and resilience within payment systems; reduce transaction costs; provide programmable transparent money; and help streamline cross-border payments.
CBDCs differ from cryptoassets like Bitcoin and Ether (Ethereum) in that a central bank can exert full control over them, guaranteeing their value remains steady unlike with cryptoassets which experience unpredictable price movements.
CBDCs may present additional challenges. First, their creation may require expensive infrastructure investments. Furthermore, some may view CBDCs as attempts by central banks to control people’s financial lives – therefore governments should educate citizens about both benefits and risks before moving ahead with implementation of such schemes.