As governments around the world move forward with CBDC research and development, it has become clear that such assets will play a notable role in achieving a stable economy.
But what are the benefits of implementing CBDCs for the global payment system, and what are the potential downsides that are causing governments around the world to tread carefully in this matter?
The state of the CBDC race
According to the Atlantic Council’s Central Bank Digital Currency Tracker, 87 nations representing over 90% of the global GDP are actively exploring CBDCs.
Among them, nine countries have already launched their state-issued digital currencies. Meanwhile, 15 central banks are currently piloting their CBDCs, with China being the global leader among major economies that even showcased the trial version of the e-CNY during the 2022 Winter Olympics.
The remaining contenders in the CBDC race are either developing or researching the potential implementation of a central bank digital currency. One of the newest joiners in this field is the United States, where the exploration of a state-issued cryptocurrency has officially kicked off after President Joe Biden signed an executive order on digital assets on March 8, 2022.
CBDCs to power economic stability
As the digital version of a nation’s fiat currency, CBDC is not subject to the excessive volatility of cryptocurrencies yet retain most of their benefits (e.g., instantaneous transactions and low fees) and offers complete control to the state. Most importantly, CBDCs will significantly affect the financial system and its structure.
Currently, if you pay a bill via your debit card or bank account, you spend privately-issued money held at commercial financial institutions. For that reason, you don’t have a direct claim on the state-issued public money (like with cash) but on your bank’s deposits that are only partly backed by liquid reserves held at the central bank.
CBDCs don’t necessarily involve the participation of intermediaries (e.g., private financial institutions) as they can be issued directly to citizens via financial accounts connected to the central bank. However, this implementation is rather inefficient and resource-heavy.
With the hybrid structure most governments are exploring, CBDCs represent a direct claim on the central bank, offering citizens access to safe public money instead of risky commercial bank deposits. At the same time, private financial institutions handle the technical side of the payment network, which fuels innovation.
With central bank guarantees, CBDCs lack the credit and liquidity risks of the existing economic system, which states could utilize to achieve better financial stability. Furthermore, governments can leverage the blockchain’s traceability to execute monetary policies in real-time and tackle financial crime more efficiently.
CBDC implementation remains a challenge to be solved
Despite their advantages, some potential downsides pose a challenge in implemenпting CBDCs into the existing financial system. Among them, privacy is the top concern. Since blockchain transactions are recorded publicly on the ledger, the state could gain increased insight into citizens’ personal finances.
Furthermore, governments have to be smart about the actual implementation. They have to make CBDCs enticing for consumers so they would have a reason to replace their current payment services. But at the same time, they would need to turn to the central bank to lend out money, since commercial banks don’t have access to retail deposits, which could drastically change the credit landscape.
Moreover, as we have seen in the crypto industry, cybercriminals can adapt to changes quickly and efficiently, especially when they see lucrative opportunities. As a result, the government has to put a major focus on securing its CBDC ecosystem as well as monitoring and responding to new types of financial crime.