Central bank digital currency (CBDC) is a new, digital form of money that will soon be available to the public. The first nationwide CBDC was launched in the Bahamas in October 2020, and many others will follow. In Europe, the digital euro is planned to launch in 2026 and will transform our payments system.
The European Central Bank (ECB) has been looking at CBDCs for some time, and the investigation phase began in summer 2021. There’s a lot to consider: security, design, distribution and much more. Like other financial institutions, the ECB has seen the need to adapt to an increasingly digitalized world. In November 2022, ECB president, Christine Lagarde, said: “Almost half of euro-area consumers say they prefer to pay with cashless means of payments, such as cards.”
CBDCs do not (necessarily) mean the end of cash. They’re a reflection of the trend towards digital payments that is happening anyway, accelerated by the pandemic. The professional-services company PwC expects global cashless payment volumes to rise more than 80 per cent between 2020 and 2025.
The consultancy Deloitte has reported that “the evolution of CBDCs will affect the whole financial ecosystem”. Issued by a central bank, a CBDC shares similarities with cryptocurrency — both are a purely digital form of money based on a digital ledger, using blockchain-type technology. However, central banks are quick to distance themselves from the craziness of crypto, saying that CBDCs will not suffer from the same volatility, since they are pegged to the value of the country’s fiat currency.
How do CBDCs differ from other payment methods?
CBDCs are held in digital wallets and can be transferred seamlessly to other digital wallets — much the same way as Venmo or ApplePay work, but without the need for such third-party companies. The removal of intermediaries will make cross-border payments much simpler and cheaper. Direct CBDC payments to other digital wallets will essentially be free.
As CBDCs are cash’s digital counterpart, they must be universally accessible. Children and other people without a bank account, for example, need to be able to use them easily. In the euro area alone, 13.5 million adults do not have a bank account and use cash only. Worldwide, there are 1.7 billion “unbanked” adults. It is hoped that CBDCs will offer a payment method that promotes financial inclusion, letting people transfer money directly via a smart wristband or phone, with no transaction fees.
Another key consideration is privacy. For better or worse, cash is completely anonymous. Can CBDCs offer a similar level of privacy? A survey by the monetary authority of the eurozone, Eurosystem, found that people consider privacy to be the most important aspect of a digital euro. However, Jens Weidmann, a former president of the Deutsche Bundesbank, says: “A digital euro would not be as anonymous as cash. In order to prevent illicit activities … legitimate authorities would have to be able to trace transactions.”
Is digital money the future?
It’s still early days for CBDCs, but things are developing quickly. According to the Atlantic Council’s CBDC tracker, 11 countries have fully launched a digital currency already, with 17 more at the pilot stage. Currently, 114 countries, which together produce more than 95 per cent of global GDP, are exploring the introduction of a CBDC — with 60 of them reportedly in an advanced stage of development.
CBDCs are coming, but ultimately, it is public understanding of the benefits and widespread acceptance that will be key to their long-term success.