The Central Bank of China wants to introduce its eCNY during the Olympic Games in 2022, the European Central Bank (ECB) announced in the middle of July that they will start into an investigation phase of two years to research on a digital Euro and the FED is thinking about the Digital Dollar. You might ask yourself, what are the Central Banks working on and how will you be affected.
This article is a guide into the world of Central Bank Digital Currencies (CBDC). In the first half of your study trip, you will learn what is meant by CBDC and what questions (technically and legally) a Central Bank is considering for the development of a CBDC.
In the second half you will deep dive into special CBDC projects, news and get to know the ecosystem.
I promise you, at the end you will be surprised about the high number of Central Banks working on their digital currencies and how many collaborative projects already exist.
Let’s start first with some basic understanding.
What is CBDC — compared to cash, book money, stablecoins and cryptocurrencies?
CBDC stands for Central Bank Digital Currency. To understand what CBDC means, lets have a look at forms of money that we all know [1].
Fiat money, better known as cash, is legal tender. This means, it is used for the legally effective fulfillment of contractual obligations. It is backed by the Central Bank, which is in most countries the financial institution that is responsible for overseeing the monetary system and policy of a nation or group of nations (ECB), regulating its money supply, and setting interest rates.
Book money is known as the credit balance in your bank account. It looks like it is digital, because you can use it for online banking, but only the representation form (e.g. your banking app) is digital. When you withdraw money from your account, the book money is turned into cash, so the bank has a distributing role for cash.
A cryptocurrency is a digital currency that doesn’t have a central authority behind. As “blockchain native” it is based on distributed ledger technology and secured by cryptography. It is not linked to a fixed value, therefor a cryptocurrency is often very volatile (compared to not private money). The most famous cryptocurrency is e.g Bitcoin.
Unlike cryptocurrencies, stablecoins are private issued digital currencies, that are pegged to a stable asset e.g., a fiat currency. Depending on the underlying, they are less volatile.
So how, does CBDC fit into this ecosystem? Do we need an additional means of payment?
How to gain the knowledge?
We will now look into the topic. But first I’ll give you some general information about how to gain knowledge and what level of understanding you will reach after your 24hours journey through the world of CBDC.
As learning sources for your study, I choosed three different formats that are all free of charge: Papers, Podcasts and Videos. Please go through all of them. Even, if the papers might be challenging readings, they provide very important basic knowledge, that you need to understand before jumping to the next topic.
You will see, the second half of the timeline will be fun, so stay strong with the readings.
All selected sources are published by neutral actors, as I didn’t want to leave an after-taste.
Nevertheless, you will find additional publications of actors with stakes in CBDC, in the last chapter, in case want to dive deeper into the topic. So you will get some advices how to follow up.
What is the level of understanding that will be acquired?
As an interested citizen — I assume you are one, because you are reading this article — you should have as much knowledge that you are able to develop a valuable opinion. But you don’t have to be an expert. This is the grade crossing I’ll try to achieve with you throughout this study hours.
It is for sure that the research of the Central Banks and the development into a more digital society will have an impact. You may be directly affected through new ways of payment, but this might not be your only touching point with CBDC in the future. New business models will pop out, and maybe your car will pay one day its gasoline or electro charging on its own with your digital currency. This would be one example for the so-called Machine-to Machine (M2M) payment, which is one future leading topic around CBDCs.
So with the following study timetable you will be empowered to understand what CBDCs are, what the motivation of the central banks are, what the considered questions (legally and technically) around CBDCs are, what the status of CBDCs in different countries is and who the actors are.
Study Journey
The journey will last approximately 24 hours, depending on your velocity and interest of diving into the topics.
Introduction into CBDC
You will spend the first five hours to get a basic understanding about CBDC.
Start with listening to the podcast of J. David Stein to get an overview on how the financial system works and how CBDC fits into it. J. David Stein is author of Money for the Rest of Us 10 Questions to Master Successful Investing Prior and launching this podcast that reaches approximately 40.000 listeners.
Money for the rest of us, episode 319, here come central bank digital currencies
Continue with reading a paper of the Bank of International Settlements (BIS) that has been published in October 2020. It is a joint report by the Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, Board of Governors of the Federal Reserve and Bank for International Settlements and builds the basis of most of CBDC papers published afterwards. During your study you will cross this paper as a reference of speakers, papers and citations.
Central bank digital currencies: foundational principles and core features
The Bank of International Settlements is a main driver when it comes to research on CBDC, especially concerning cross-border topics.
For this reason, I want to give a brief introduction on who they are:
The BIS[2] was created in 1930 to support central banks’ pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks. Through its Innovation Hubs the BIS promotes the collaboration between the Central Banks in the world not only for the development of CBDCs but also e.g., green finance or cybersecurity.
Continue with watching the recording of a panel discussion organized by BLOCKCHANCE Online Live.
CBDC: The Overdue Evolution of Money? — BCO#4
In this BLOCKCHANCE Online LIVE show, the host Sönke Mißfeld discusses with Prof. Dr. Philipp Sandner and Alexander Bechtel why almost all central banks are working on digital currencies and what the chances and risks for society are.
Prof. Dr. Philipp Sandner is one of Germany’s leading economists and blockchain experts. He is professor and Head of the Blockchain Center at the Frankfurt School of Finance and Management. Alexander Bechtel is Head of DLT and Digital Asset Strategy at Deutsche Bank Corporate Bank and PhD Candidate at University of St. Gallen (HSG).
BLOCKCHANCE has been founded in 2018 by Fabian Friedrich. The company includes the leading blockchain conference Blockchance Europe, BLOCKCHANCE Ventures (Germany’s first blockchain acceleration fund), BLOCKCHANCE Campus (a co-working space in Hamburg for start-ups and creative departments of renowned companies) and BLOCKCHANCE Online LIVE, a platform to discuss current developments in the blockchain and DLT-space. F.Friedrich is also a co-founder of the International Association for Trusted Blockchain Applications (INATBA) and the Hanseatic Blockchain Institute.
Regional information
After watching the video, you can choose on which region you want to focus, to get more information about the considerations of the Central Banks.
- Issued by the ECB: Read the Report on a digital Euro which was published in October 2020. The report is NOT a description of how the digital Euro will look like. It is more an overview of possible faces a digital Euro could have. The ECB identifies characteristics of a potential digital Euro which can be scenario-based or general and gives through its report an insight about the considerations of a developed country/region.
To conclude this chapter Listen to ECB Podcast Is it time for a digital Euro.
- Issued by the Digital Dollar Foundation: Read the Paper Digital Dollar Project issued by the Digital Dollar Foundation in cooperation with Accenture. Similarly to the report on a digital Euro it is NOT a description about how the digital dollar will be implemented. It is an overview on which possibilities exist for CBDCs.
After this introductory information we will have a deeper look into the technological aspects of CBDCs. Don’t worry you don’t need to be a physician, IT-expert or economist, to understand the discussions on how to implement technically a CBDC.
Technological aspects of a CBDC
For diving deeper into the possible technological aspects of a CBDC read the following research paper of the BIS, which is building on the one you already read:
Central bank digital currency: the quest for minimally invasive technology
Legal aspects of a CBDC
Beside the technical aspects of a CBDC the legal aspects play an important role. Most regulators find it difficult to write a new legislation if there is no decision taken about the (technical) implementation of a CBDC. However, first considerations have been made. Of course, you don’t need to be a lawyer to understand the recommended paper.
Start with reading a paper issued by the International Monetary Fund (IMF) in November 2020: IMF, Legal Aspects of Central Bank Digital Currency: Central Bank and Monetary Law Considerations,
The International Monetary Fund (IMF)[3] is an organization of 190 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
After having read the paper, listen to the Podcast of CB on air, in which Arthur Rossi and Akihiro Yoshinaga discuss the legal foundations of CBDC under central bank and monetary law. They have written the paper you just read.
CB on air, TT7, The legal foundations of a CBDC.
CB on air is the podcast of the Central Banking News platform[4]. Central Banking has provided a platform for central bankers to explain their important work to their peers, their stakeholders, and the wider financial community.
What you have learned by now
For now, you should have a good overview on what the Central Banks are working and what is meant by Central Bank Digital Currencies.
You know
- What is the difference between a retail CBDC and a wholesale CBDC
- Who are the actors in both systems
- What are the main drivers for Central Banks to issue a CBDC
- What core features should a CBDC include
- What kind of infrastructures have been considered and what are their advantages and disadvantages
- What is the legislation for a CBDC depending on
Deep dive into CBDC projects
If you can answer all these questions we can now start with the more fun part of our journey. We will deep dive into different CBDC projects, get to know some actors of the CBDC ecosystem and read some gossip from around the world.
Please take the time to stroll through the information and rest where you have the most fun. I suggested approximately 11 hours for this part, so there is enough time for your deep dives.
- Checkout the CBDC Tracker. The CBDC Tracker is a website on which you can find the CBDC status of each country. It is based on the information the Central Banks issued on their activities. Browse information about the countries you are curious about. I recommend the following countries: Bahamas, Sweden, China
- Watch the panel discussion: Central bank digital currencies in practice — What can we learn from CBDC pioneers? In this webinar of the bdvb[5] , CBDC projects that are currently most advanced are discussed and it is outlined what would be the implications of these projects for the ECB’s CBDC project. In particular, it focusses on the following CBDC projects: Eastern Carribean Currency Union: DCash (Expert: Simon Chantry), Bahamas: Sand Dollar (Expert: Evgeni Mitkov), Marshall Islands: Sovereign (Expert: Dr. Peter Dittus)
- Watch panels from the DMI Symposium that took place in April 2021. The Digital Monetary Institute (DMI)[6] is based on the Think Tank OMFIF. During this symposium it brought together 2,000+ policy-makers, technology experts and investors to push the boundaries of the discussion on practical and theoretical aspects of digital currencies and the future of capital markets. I would recommend the panels:
o Presentation: China’s digital currency and the evolution of CBDCs
o Presentation: Solving offline payments for scalable and interoperable CBDCs
o From cryptocurrencies, stablecoins and Diem to CBDC’s
- Watch panels from BIS Innovation Summit that took place in March 2021. You have already read some papers of the BIS, so enjoy now their panels. My favorite panels were:
o How can central banks innovate in the digital age?
o Project mCBDC Bridge
o The Governors: what does central bank innovation mean to you?
- Check the CBDC insider for latest news on CBDCs in the world and look for the news about your country and the countries you are interested in.
We now come to the end of our study trip through the CBDC universe.
After finishing this 24hours odyssey, you have a good overview about the various and multiple considerations on Central Bank Digital Currencies.
You are now able to build your own opinion on CBDC.
And now?
You have seen that there is happening a lot out there and the wave the Central Banks are surfing on is still building up.
In case you want to continue surfing that wave
- Check regularly the CBDCinsider.
- Follow the people mentioned above on LinkedIn and Twitter. Furthermore, you can follow John Kliff, Jonas Gross, John Velissarios, Ralph Auer, John Ho.
- Register on Newsletter of DEA and OMFIF
- Participate in event of DEA, OMFIF, 101 Blockchains and the CBDC Thinktank
If you have not read enough yet, and want to learn more there are some more papers I recommend
For more general information:
For more general information:
- ECB: Tiered CBDC and the financial system
- Deloitte: Are Central Bank Digital Currencies (CBDCs) the money of tomorrow?
- Accenture: THE (R)EVOLUTION OF MONEY II
- Check out the papers of the Bank of Canada
For more information about the technical aspects
- Bisointrails: Infrastructure and Design of Central Bank Digital Currencies
- Brookings: Design choices for central bank digital currency: Policy and technical considerations
For information from the key players
Remarks
I hope you enjoyed your 24 hours in the world of CBDC.
If you like this article, I would be happy if you forward it to your colleagues or share it on social networks. If you are an expert in the field and want to criticize or endorse the article or some of its parts, feel free to leave a private note here or contextually and I will respond or address.
