How Central Bank Digital Currencies (CBDCs) Could Change the Future of Money

Have you ever wondered what money will look like in the future? Will we still use cash, cards, or mobile apps to pay for goods and services? Or will there be a new form of money that is faster, cheaper, and more inclusive?

In this blog post, I will explain how central bank digital currencies, or CBDCs, could be the next big thing in the world of money based on the speech titled "The future of money: a possible role for central bank digital currencies and their implication" by Alexandre Tombini Chief Representative, Representative Office for the Americas, Bank for International Settlements.

CBDCs are a new type of money that is issued by central banks and exists in digital form. They are not the same as cryptocurrencies, such as Bitcoin or Ethereum, which are created by private entities and operate outside the control of governments and central banks.

CBDCs could have many benefits for society, such as improving the efficiency and safety of payments, fostering financial inclusion, and supporting economic growth and development. But they also come with challenges, such as potential risks to financial stability, privacy, and cybersecurity. To overcome these challenges, central banks need to carefully design and implement CBDCs, and collaborate with the private sector and other central banks.

In this blog post, I will:

• Explain what CBDCs are and how they differ from other forms of money
• Discuss the benefits and challenges of CBDCs for the monetary system and society
• Share some examples of CBDC initiatives around the world, especially in the Caribbean and the Americas
• Highlight the role of the Bank for International Settlements (BIS) in supporting central banks on digital innovation issues

What are CBDCs and how do they differ from other forms of money?

Money is anything that people accept as a medium of exchange, a unit of account, and a store of value. Throughout history, money has taken different forms, such as coins, paper notes, bank deposits, and electronic transfers. Today, most money is digital, meaning that it exists as data in computers and can be transferred electronically.

However, not all digital money is the same. There are two main types of digital money: central bank money and commercial bank money.

Central bank money is issued by central banks, which are the authorities that manage the supply of money and oversee the payment system in a country. Central bank money includes physical cash and reserve accounts that commercial banks hold at the central bank.

Commercial bank money is issued by commercial banks, which are the financial institutions that provide banking services to households and businesses. Commercial bank money includes bank deposits and credit cards that people use to make payments.

CBDCs are a new type of central bank money that exists in digital form. Unlike physical cash, CBDCs can be accessed and transferred electronically. Unlike reserve accounts, CBDCs can be used by households and businesses for general purposes, not just by financial institutions for interbank payments. CBDCs are a direct claim on the central bank, which means they are fully backed by the issuing authority and do not depend on the solvency of commercial banks.

CBDCs can be either wholesale or retail.

Wholesale CBDCs are only accessible to financial institutions and can be used for large-value and high-speed transactions between them.

Retail CBDCs are accessible to households and businesses, and can be used for small-value and low-speed transactions with anyone. Retail CBDCs can be further classified into account-based or token-based. Account-based CBDCs require users to have an account at the central bank or a private intermediary, and rely on identity verification to authorize transactions. Token-based CBDCs do not require users to have an account, and rely on cryptography to ensure the validity of transactions.

What are the benefits and challenges of CBDCs for the monetary system and society?

CBDCs could offer many benefits for the monetary system and society, such as:

• Improving the efficiency and safety of payments. CBDCs could reduce the costs and frictions associated with handling cash and intermediating transactions. CBDCs could also enable faster, more secure, and more transparent payments, both domestically and across borders. CBDCs could also enhance the resilience and diversity of the payment system, by providing a public alternative to private payment solutions.
• Fostering financial inclusion. CBDCs could increase access to financial services for the unbanked and underbanked populations, especially in remote and rural areas. CBDCs could also lower the barriers to entry and participation in the formal financial sector, by offering a simple and convenient payment option that does not require a bank account or a credit history. CBDCs could also support economic empowerment and social welfare, by enabling more efficient and inclusive delivery of public services and transfers.
• Supporting economic growth and development. CBDCs could stimulate economic activity and productivity, by encouraging more efficient allocation and use of resources. CBDCs could also facilitate innovation and competition in the financial sector, by creating new opportunities and challenges for existing and new players. CBDCs could also enhance monetary policy effectiveness and transmission, by providing a direct channel for influencing the demand and supply of money.

However, CBDCs also come with challenges, such as:

• Potential risks to financial stability. CBDCs could affect the intermediation and maturity transformation functions of commercial banks, by creating a substitution or crowding out effect on bank deposits. CBDCs could also increase the likelihood and severity of digital bank runs, by providing a more attractive and accessible alternative to bank deposits in times of stress. CBDCs could also pose operational and cyber risks, by creating new vulnerabilities and dependencies in the payment system.
• Privacy and cybersecurity issues. CBDCs could raise concerns about the protection and use of personal and transactional data, by creating new trade-offs between anonymity and traceability. CBDCs could also expose users and providers to cyberattacks and fraud, by creating new targets and incentives for malicious actors. CBDCs could also require robust legal and regulatory frameworks, by creating new obligations and responsibilities for the central bank and the private sector.
• Challenges with adoption and implementation. CBDCs could face difficulties in achieving widespread acceptance and usage, by competing with existing and emerging payment solutions. CBDCs could also require substantial efforts and resources, by involving complex technical and organizational changes. CBDCs could also entail significant coordination and cooperation, by affecting multiple stakeholders and jurisdictions.

What are some examples of CBDC initiatives around the world, especially in the Caribbean and the Americas?

CBDCs are not a hypothetical concept, but a reality that is being explored and adopted by central banks around the world. According to a recent survey by the BIS, 86% of central banks are engaged in some form of CBDC work, and 60% are conducting experiments or proofs-of-concept. Moreover, 14% of central banks have moved to development or pilot stages, and 2% have already launched CBDCs.

The Caribbean and the Americas are among the most active regions in CBDC initiatives, with several examples of research, exploration, and implementation. Some of these examples are:

• The Bahamas. The Central Bank of The Bahamas launched the world’s first live retail CBDC, the Sand Dollar, in October 2020. The Sand Dollar is a token-based CBDC that can be accessed through mobile wallets provided by authorized financial institutions. The Sand Dollar aims to improve the efficiency and inclusion of payments, especially in the remote islands of the archipelago. The Sand Dollar has a transaction limit of $500 per day, and is fully interoperable with other payment methods.
• The Eastern Caribbean. The Eastern Caribbean Central Bank launched its retail CBDC, DCash, in March 2021. DCash is an account-based CBDC that can be accessed through mobile wallets provided by licensed intermediaries. DCash aims to modernize and harmonize the payment system across its eight member countries, which share a common currency, the Eastern Caribbean dollar. DCash has a transaction limit of $10,000 per month, and is fully convertible with physical cash.
• Jamaica. The Bank of Jamaica launched its retail CBDC, JAM-DEX, in July 2022. JAM-DEX is a token-based CBDC that can be accessed through mobile wallets provided by authorized deposit-taking institutions. JAM-DEX aims to enhance the efficiency and diversity of payments, and to support the development of the digital economy. JAM-DEX has a transaction limit of $100,000 per day, and is fully exchangeable with physical cash.
• Canada. The Bank of Canada has been conducting extensive research on a potential retail CBDC, the digital Canadian dollar. The Bank of Canada has explored various design and policy issues, such as the degree of anonymity, the role of the private sector, and the impact on financial stability. The Bank of Canada has also collaborated with other central banks and international organizations, such as the BIS Innovation Hub, on experimental projects on CBDCs.
• The United States. The Federal Reserve has been studying the opportunities and challenges of a potential retail CBDC, the digital dollar. The Federal Reserve has established several research and technical partnerships, such as with the MIT Digital Currency Initiative, on the feasibility and design of a CBDC. The Federal Reserve has also engaged with the public and the private sector, such as through a public consultation and a pilot program, on the implications and expectations of a CBDC.
• Brazil. The Central Bank of Brazil has been working on two parallel initiatives related to CBDCs: Pix and DREX. Pix is a fast payment system that was launched in November 2020, and that allows instant and low-cost transactions between individuals and businesses. Pix has seen remarkable growth and adoption and has contributed to greater efficiency and inclusion of payments. DREX is a wholesale CBDC project that is under development, and that aims to improve the speed and security of interbank payments.

Key Takeaways

1. CBDCs are a new type of central bank money that exists in digital form. They are not the same as cryptocurrencies, which are created by private entities and operate outside the control of governments and central banks.
2. CBDCs could offer many benefits for the monetary system and society, such as improving the efficiency and safety of payments, fostering financial inclusion, and supporting economic growth and development.
3. CBDCs also come with challenges, such as potential risks to financial stability, privacy, and cybersecurity. To overcome these challenges, central banks need to carefully design and implement CBDCs, and collaborate with the private sector and other central banks.
4. CBDCs are being explored and adopted by central banks around the world, with several examples of research, exploration, and implementation in the Caribbean and the Americas.

P.S. What do you think about the future of money? Do you believe CBDCs will become the norm, or do you think other forms of digital money will prevail? Share your thoughts in the comments below! I’d love to hear your perspective. Remember, there’s no right or wrong answer here - just different viewpoints to consider. So, don’t hesitate to join the conversation!

Disclaimer: The views expressed in this blog are not necessarily those of the blog writer and his affiliations and are for informational purposes only.

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