Currency is a form of money that is used to facilitate the exchange of goods and services. It is typically issued by a government or central bank and is accepted at its face value. Currency can take many forms, including coins, paper money, and electronic money.
What is Central Bank Digital Currency?
A central bank digital currency (CBDC) is a digital or electronic form of a fiat currency that is issued by a central bank. It is similar to physical cash, but it exists only in digital form. CBDCs are not cryptocurrencies, which are typically decentralized and not issued by a central authority.
There are two main types of CBDCs: wholesale and retail. Wholesale CBDCs are designed for use by financial institutions, while retail CBDCs are designed for use by individuals and businesses.
The main benefits of CBDCs include:
- Increased efficiency and convenience: CBDCs can make payments faster, cheaper, and more convenient.
- Improved financial inclusion: CBDCs can help to bring more people into the formal financial system.
- Enhanced monetary policy: CBDCs can give central banks more control over the money supply and interest rates.
However, there are also some potential risks associated with CBDCs, such as:
- Cybersecurity risks: CBDCs could be vulnerable to cyberattacks.
- Privacy concerns: CBDCs could be used to track people’s spending habits.
- Economic disruption: CBDCs could disrupt the financial system.
Central banks around the world are currently exploring the potential benefits and risks of CBDCs. Some countries, such as China and Nigeria, have already launched CBDC pilots. It remains to be seen whether CBDCs will become widely adopted, but they have the potential to revolutionize the way we pay for goods and services.
Here are some of the countries that have launched or are exploring the launch of a CBDC:
- China: The People’s Bank of China (PBOC) has been conducting pilots of its CBDC, the digital yuan, since 2014.
- Nigeria: The Central Bank of Nigeria (CBN) launched its CBDC, the eNaira, in October 2021.
- Uruguay: The Central Bank of Uruguay (BCU) launched a pilot of its CBDC, the sandu, in 2020.
- The Bahamas: The Central Bank of The Bahamas (CBOB) launched its CBDC, the sand dollar, in 2020.
- Sweden: The Riksbank, Sweden’s central bank, is conducting a pilot of its CBDC, the e-krona.
These are just a few of the countries that are exploring the potential of CBDCs. It remains to be seen whether CBDCs will become widely adopted, but they have the potential to revolutionize the way we pay for goods and services.
- How will CBDCs be implemented? There are a number of different ways that CBDCs could be implemented. Some central banks are considering issuing CBDCs through a central bank digital wallet, while others are considering issuing CBDCs through commercial banks.
- What are the security risks of CBDCs? CBDCs could be vulnerable to cyberattacks, just like any other digital system. Central banks will need to take steps to mitigate these risks, such as using strong encryption and implementing robust cybersecurity measures.
- How will CBDCs affect financial stability? CBDCs could have a number of different effects on financial stability. For example, they could increase the efficiency of the payments system, which could make it easier for financial institutions to manage their liquidity. However, they could also lead to increased competition in the payments market, which could put some financial institutions at risk.
- What are the privacy implications of CBDCs? CBDCs could be used to track people’s spending habits. This could raise privacy concerns, especially if CBDCs are linked to people’s identities. Central banks will need to consider these concerns when designing CBDCs.
- What are the economic implications of CBDCs? CBDCs could have a number of different effects on the economy. For example, they could make it easier for people to save money, which could boost economic growth. However, they could also lead to inflation, if central banks are not careful.
These are just a few of the questions that need to be answered before CBDCs can be widely adopted. Central banks around the world are currently exploring the potential benefits and risks of CBDCs, and it will be interesting to see how they develop in the coming years.
What are the benefits of using CBDCs over traditional currency?
Central Bank Digital Currencies (CBDCs) are digital or virtual currencies that are issued by a central bank and are legal tender. They are designed to offer the same features as traditional fiat currency, but with the added benefits of digital technology.
There are a number of potential benefits to using CBDCs over traditional currency. These include:
- Improved payment efficiency and accessibility: CBDCs can be used to make payments more quickly and easily, both online and offline. This can be especially beneficial for people who do not have access to traditional banking services.
- Enhanced financial inclusion: CBDCs can help to increase financial inclusion by making it easier for people to access and use digital financial services. This is particularly important in developing countries where access to traditional banking services is limited.
- Increased security and transparency: CBDCs can be designed to be more secure than traditional currency, as they can be protected by cryptography and other security measures. CBDCs can also be more transparent, as they can be tracked and traced more easily than traditional currency.
- Reduced costs and risks of physical cash handling: CBDCs can help to reduce the costs and risks associated with physical cash handling. This is because CBDCs do not need to be printed or transported, and they are less likely to be lost or stolen.
- Potential for monetary policy implementation: CBDCs can be used to implement monetary policy more effectively. For example, central banks could use CBDCs to provide negative interest rates or to distribute digital stimulus payments.
However, there are also some potential drawbacks to CBDCs, such as the risk of increased surveillance and the potential for disruption to the financial system. These risks need to be carefully considered before CBDCs are widely adopted.
Overall, CBDCs have the potential to offer a number of benefits over traditional currency. However, it is important to carefully consider the potential risks before CBDCs are widely adopted.
What is the current status of CBDC adoption around the world?
The adoption of CBDCs is still in its early stages, but there has been a significant increase in interest in recent years. According to the Atlantic Council, 130 countries, representing 98 percent of global GDP, are exploring a CBDC. Of these, 64 countries are in an advanced phase of exploration (development, pilot, or launch).
Some of the countries that have made the most progress on CBDC adoption include:
China: China is one of the leading countries in CBDC development. The People’s Bank of China (PBoC) has been conducting pilots of its digital yuan since 2019. The digital yuan is currently being used in a limited number of cities, but the PBoC plans to launch a nationwide rollout in the coming years.
Sweden: Sweden is another country that is making significant progress on CBDC adoption. The Riksbank, Sweden’s central bank, has been conducting pilots of its e-krona since 2020. The e-krona is currently being used in a limited number of trials, but the Riksbank plans to launch a nationwide rollout in the coming years.
United States: The US Federal Reserve is also exploring the possibility of issuing a CBDC. The Fed has not yet made any decisions about whether or not to issue a CBDC, but it is conducting research and analysis on the topic.
India: The Reserve Bank of India (RBI) has also been exploring the possibility of issuing a CBDC. The RBI has conducted a pilot of its digital rupee since 2022. The digital rupee is currently being used in a limited number of trials, but the RBI plans to launch a nationwide rollout in the coming years.
It is still too early to say how widespread CBDC adoption will be in the future. However, the increasing interest in CBDCs suggests that they have the potential to become a major new form of digital currency.
The current status of CBDC adoption around the world is as follows:
- Number of countries exploring CBDC: As of December 2021, approximately 130 countries, representing 98 percent of global GDP, are exploring the possibility of implementing a CBDC. This is a significant increase from May 2020 when only 35 countries were considering CBDCs1.
- Countries with CBDC projects: Several countries have already launched or are in the process of launching CBDC projects. Some notable examples include:
- China: China’s digital yuan pilot program is already being used for payments, including salary payments.
- The Bahamas: The Bahamas has introduced the “sand dollar” as legal tender, aiming to serve unbanked and under-banked populations.
- Australia, Thailand, Brazil, India, South Korea, and Russia: These countries are either running CBDC projects or preparing to launch them3.
- Research and development: As of July 2022, there were nearly 100 CBDCs in various stages of research or development worldwide. This indicates a significant interest and effort in exploring the potential of CBDCs6.
- International dimension and consequences: The international dimension of CBDCs is still relatively unexplored, and there are ongoing discussions about the potential consequences of CBDC adoption. These discussions include considerations such as the impact on domestic currencies, cross-border use, and the design of CBDCs4.
It is important to note that while many countries are exploring CBDCs, not all of them have made a final decision to adopt them. Each country will need to assess the potential benefits and challenges before proceeding with the implementation of a CBDC.
Problems related to Central Bank Digital Currency
We are missing an opportunity to level the monetary playing field in the interests of all citizens
The following story will highlight the problems related to CBDCs.
In the course of his journey down the M1 motorway in England, an observer was struck by a spray-painted message adorning a flyover, bearing the words “Stop CBDC.” The same message had caught his attention earlier that week when he spotted it on a placard positioned opposite Downing Street. Evidently, these sentiments were not confined to isolated individuals. An ongoing petition had garnered tens of thousands of signatures from concerned citizens across the UK, all advocating for the cessation of CBDC. For them, the concept of central bank digital currency was nothing short of a scandal.
For those unfamiliar with the term, CBDC stands for central bank digital currency—a digital substitute for physical cash. As it stands, over 130 countries worldwide were considering the issuance of digital cash to their citizens. In the UK, the Treasury and the Bank of England had released a consultation document in February, to which the aforementioned petition served as the citizen’s response.
Eight years prior, well before CBDC became an acronym, the observer delivered a speech containing a few seemingly uncontroversial lines about the potential for digital cash. To his surprise, it triggered a torrent of criticism. A former lecturer of his even penned a paper titled “Haldane Cashes Out on Cash,” while a petition emerged, seeking to halt the proposal to eliminate cash (ironically, the observer signed it in an attempt to lighten the mood).
These responses underscored the fact that cash transcends its role as a mere payments technology. It embodies one of the purest and most ancient forms of public good—a symbol of identity and sovereignty. Decisions regarding this public good were, rightfully, the domain of citizens rather than central bankers or cryptographers. They represented social choices, deeply rooted in emotions.
Undoubtedly, CBDCs raised genuine social concerns. Among them were worries about the privacy of the currency and the continued access to cash for those who neither desired nor could access CBDC. Furthermore, there were apprehensions that deposits might flee from commercial banks to the perceived safety of CBDC at the first hint of financial turmoil.
Such concerns about financial stability were not to be brushed aside. They led virtually all CBDC designers, as well as commercial banks, to conclude that CBDC should offer no interest. The rationale was that providing interest would only enhance its attractiveness and add to the liquidity pressures on banks during times of stress. Strangely, this design choice had largely gone unnoticed by the public, despite its significant and lasting implications for citizens.
Cash was not merely a medium of payment; it also served as a means of financing governments and central banks. Physical cash essentially provided an interest-free loan to the government—a direct tax on citizens, proportionate to their cash holdings, with a tax rate corresponding to the interest rate. Most people were blissfully unaware of this hidden tax. The name given to this tax—seigniorage—added to its air of mystery and peculiarity.
The peculiarities did not end there. Seigniorage was a covert tax that was both substantial and highly regressive. It disproportionately impacted the poorest and most disadvantaged members of society since they held cash to a greater extent. Given the global stock of physical currency estimated at around $8.3tn among the world’s largest economies, and assuming interest rates of say 5 per cent, it resulted in a tax on global citizens exceeding $400bn each year.
In a world where cash was solely physical, central banks and governments could argue that paying interest was technologically unfeasible. Seigniorage was an inevitable consequence of providing the public good of physical cash. However, with the advent of CBDC, those arguments became irrelevant. Interest could easily be paid on CBDC held by citizens, just as it had been for many decades on the CBDC held by banks (commonly referred to as “reserves”).
For many years, cash had been the only form of money that did not earn interest, disadvantaging those who held it. The introduction of CBDCs presented an opportunity to remunerate cash and level the monetary playing field for the benefit of all citizens. Yet, the designers of CBDCs rejected this option, opting instead to maintain a sizable, surreptitious, and regressive tax on their citizens. This decision was intended to safeguard banks and their financial interests, both of which had long profited from this privilege.
Cash belonged to the people, not to any private entity. This was a social choice that should be subject to debate and decision-making by the citizens. At present, they were doing neither. Right when the fiscal burden of a significant and regressive stealth tax could have been alleviated, governments and central banks were reinforcing and exacerbating it. This, indeed, constituted a scandal concerning CBDCs—not merely the one debated by graffiti artists on motorway flyovers or anyone else for that matter.