The term Central Bank Digitalized Currency (CBDC) refers to the virtual form of fiat (government issued) currency. CBDCs offer the same level of faith and credit than the issuing governments’ central bank. A CBDC can be seen as an electronic record or digital token of a country’s official currency. This form of currency is stored in a specialised, digital wallet, created by the responsible government.
The key difference between a CBDC wallet, and a digital banking account as used today, is that currency held as a CBDC is equivalent to a deposit at the respective central bank. There are two types of CBDC’s, Wholesale and Retails CBDC’s. Wholesale CBDC’s rely on existing financial system infrastructure to function, such as banks and other financial institutions.
Wholesale CBDC are the reserve deposits of commercial banks kept at central banks, only accessible to financial institutions, not individuals. One transaction use case of this type of CBDC is interbank payment, where assets or currencies are exchanged between two banks. Retail CBDC’s on the other hand would be an extension of cash so to say, and the type of digital currency used every day for transactions by retail clients.
Increased adoption of cryptocurrencies and private companies’ solutions for digitalised payments have popularised digital payments over the use of physical cash. Although they offer security and a given degree of decentralization, cryptocurrencies have a major obstacle in the way for scalable, mass adoption. Most cryptocurrencies, like Bitcoin, are extremely volatile and are seen by many as an asset class of its own, rather than a way of daily value exchange. On the other hand, private companies like Apple have introduced their own transactional method (Apple Pay).
In either one of these payment systems, monetary system stability is hard to measure, as the central bank is not involved in any way. The dependence on unregulated cryptocurrencies built on public blockchains or on private companies to conduct daily transactions can be seen as an issue for financial stability and for state authority. Through the issuing of CBDC’s, central banks aim to capture a significant share of the market, largely based on its trustworthiness and credibility.
One of the main opportunities of CBDC’s is financial inclusion. Citizens who currently do not have access to banking services, can do so at greater ease through CBDC implementation, driving economic development. Another opportunity is simplified monetary and fiscal policy, and greater financial stability. They also provide added security to cash, as physical currency can be lost, damaged, or counterfeit, while digitalised currency cannot.
One of the main challenges and concerns of CBDC is the loss of transactional privacy. CBDC’s boast a record of all transaction an individual has completed, available to the government. In contrast to the complete anonymity of cash, this may be a concern for some individuals fearing stricter governmental control. However, the benefit of this is easier insight into criminal activity.
CBDC’s are currently in a developmental stage, with selected pilot projects underway by some governments. China has been developing their CBDC, the digital Yuan, since 2014. From that point to June 2021, the digital Yuan wallet has handled over 70 million transactions worth approximately $5 billion. Until recently, the usage of the digital Yuan was only offered to select individuals and entities, however the government issued an experimental wallet app to members of the public, with the aim of reaching a wider target audience. Nonetheless, users are made aware of the currently experimental nature of the app upon downloading. The app is still selective in its user base and is only available through nationalised institutions, including major domestic banks.
The Swedish central bank is also moving away from cash, as seen by their development of the electronic krona (“e-krona”) currently is testing stages. European Union officials also have high ambitions, aiming to introduce the digital euro by 2025. Additionally, the USA has plans to introduce the digitalized dollar with the goal of improving domestic transactional efficiency, but this will likely take some time. Jerome Powell, Chairman of the Federal Reserve, has stated that they would prefer to “get it right than to be first”.
The central banks of Switzerland and France, and the Bank for International Settlements have recently completed the experimental “Project Jura”. The central banks collaborated with private firms to complete cross border foreign exchange transactions, between the Euro (EUR) and the Swiss Franc (CHF). They succeeded, offering a strong case for the ease and security of international settlements between financial institutions through the use of wholesale CBDS’s.
As more and more central banks lead the way towards digital currency, scalable implementation of CBDCs is likely to advance in the future, as developed countries move away from cash as means of payment. The outlined benefits make an arguable solid use case for CBDCs.
From Cubri Services we will continue to monitor the development of CBDCs and the wider usage of digital assets.
Citations: Central Bank Digitalized Currencies Market Analysis
- “Swiss National Bank, Banque De France and BIS Conclude Successful CBDC Experiment.” swiss, https://finance.swiss/en/news-and-events/swiss-national-bank-banque-de-france-and-bis-conclude-successful-cbdc-experiment/.
- “What Is the Fuss over Central-Bank Digital Currencies?” The Economist, The Economist Newspaper, https://www.economist.com/the-economist-explains/2021/02/16/what-is-the-fuss-over-central-bank-digital-currencies.
- Seth, Shobhit. “Central Bank Digital Currency (CBDC).” Investopedia, Investopedia, 20 Jan. 2022, https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp.
- Bellusci, Michael. “Visa Partners with ConsenSys to Help Bridge CBDCs with Traditional Finance.” CoinDesk Latest Headlines RSS, CoinDesk, 13 Jan. 2022, https://www.coindesk.com/business/2022/01/13/visa-partners-with-consensys-to-help-bridge-cbdcs-with-traditional-finance/.
- Team, Editorial. “China’s Digital Yuan Wallet Arrives in Android and Apple App Stores.” Finextra Research, Finextra, 5 Jan. 2022, https://www.finextra.com/newsarticle/39461/chinas-digital-yuan-wallet-arrives-in-android-and-apple-app-stores/crypto.
- “Project Jura: Cross-Border Settlement Using Wholesale CBDC.” The Bank for International Settlements, 8 Dec. 2021, https://www.bis.org/about/bisih/topics/cbdc/jura.htm.
- “Central Bank Digital Currency (CBDC) Tracker.” CBDC Tracker, https://cbdctracker.org/