Central Bank Digital Currencies (CBDCs) are receiving more and more attention. Central banks around the world have been researching the concept and design of digital currencies for several years. With the growing popularity of Bitcoin and distributed ledger technology (DLT), a number of central banks have started internal projects to better understand DLT and its potential application to currencies.
The announcement of Facebook’s Libra in 2019 and the ensuing public sector response was probably a tipping point to a phase where central banks started to engage in research, experimentation and development of CBDCs. Cash use has been declining in recent years with the digitalisation of commerce and rise of private digital currencies. The Covid-19 pandemic has further sped up the shift toward digital payments and may give a further impulse to CBDCs.
The motivations for CBDCs’ issuance vary across countries, as do the policy approaches and technical designs. In general, CBDCs are more likely to be under research and development in countries with high mobile use, innovation capacity and search interest for CBDCs. Public interest in CBDCs is currently demonstrated by more internet searches for CBDCs and related topics. CBDCs contribute to financial inclusion, in particular in countries with low access to transaction accounts. Safe money accounts at central banks could constitute a strong instrument of financial inclusion, allowing any legal resident or citizen to be provided with a free or low-cost basic bank account.
There are two main application of CBDCs:
- Retail applications, where CBDCs can be directly held by citizens and corporates as a form of digital cash.
- Interbank or wholesale applications, where CBDC use is restricted to financial institutions, namely for interbank transactions and financial settlement.
Retail CBDCs are more likely in larger informal economies and wholesale CBDCs are more advanced in economies that have higher financial development.
While most CBDCs serve a domestic purpose, there is an interest for internationally oriented CBDCs in more internationally integrated economies, ie. projects for cross-border transactions, such as interbank settlement or migrant remittances.
More and more central banks are considering retail CBDC architectures in which the CBDC is a direct cash-like claim on the central bank but where the private sector handles all customer-facing activity.
Current CBDCs projects, at pilot or production phase, use blockchain as the underlying technology built by design to share value and transfer ownership in a secure way. It brings efficiency to money transfers and payments that do not rely anymore on intermediaries such as banks and clearing houses. As transactions can be made in real time, directly from the payer to the payee, it reduces both the risk for payment and its complexity.
The use of blockchain will help central banks prevent illicit activity by keeping track of the exact location of every unit of the currency. This tracking makes tax avoidance and tax evasion much more difficult, and much easier to spot criminal activity. The proof of transaction, via a digital record, avoids problems inherent to cash such as short-changing, cash theft and conflicting testimonies.
The issuance of central bank base money through transfers to the public could constitute a new channel for monetary policy transmission, which would allow more direct control of the money supply than indirect tools such as quantitative easing.
Looking at the most advanced projects globally, retail efforts have already produced two live projects in the Bahamas, with the Sand Dollar and in Cambodia, with the project Bakong. No interbank/wholesale CBDC projects have reached this maturity level yet. However, nearly 70% of declared wholesale projects are already running pilots, while only 23% of retail projects reached this implementation stage.
Among all current CBDC projects, the one by the People’s Bank of China (PBC) is at the most advanced stage. The Digital Yuan project in Mainland China has already reached an advanced level of trialling, with more than 2 billion yuan (~$300m) in transactions and is reportedly preparing for broader usage at the Beijing 2022 Winter Olympics.
We believe CBDCs will contribute significantly to the modernisation of the international monetary landscape, allowing for a reconfiguration in both payment and financial infrastructure. This will generate numerous opportunities for further digitisation in both corporate and financial institutions. It is still too early to capture uptake data on CBDC usage but 2021 should produce further interesting insights.