Central Bank Digital Currencies (CBDCs), the future of money?

The CBDC momentum

The buzz around CBDCs is not without reason. Recent findings by the Bank for International Settlements (BIS) have revealed that approximately two dozen central banks across both emerging and advanced economies are gearing up to introduce digital currencies into circulation by the end of this decade. This profound shift signifies a proactive response to the accelerating decline of physical cash and the rising prevalence of digital payments. This focus on the decline of money was touched upon by Ulrich Bindseil, Director General, Market Infrastructure and Payments at the European Central Bank: “In five to fifteen years, cash may no longer be used, and in this case, then there is only commercial or private money. For Central Banks, maintaining the monetary order is a fundamental choice, and CBDCs can serve as monetary anchors.

Driving forces behind CBDCs

Interest in CBDCs has surged due to several converging factors. Changes in payment methods, the evolution of financial systems, and rapid technological advancements have all played a pivotal role in this trend. Moreover, the COVID-19 pandemic has underscored the importance of resilient and efficient payment systems, further fuelling the increased attention for CBDCs. Across the globe, a massive amount of research and experimentation is being done. This triggers interesting questions, including about privacy and cost. Like anything new, the uncertainty drives discussion. “Privacy is a central topic,” said Ulrich Bindseil. “This is not only regarding the Central bank (or government) but also other involved parties. In practice, the level of privacy we have for commercial money may be sufficient for many users. This still needs to be explored further - there is a trade-off between privacy, the feasibility thereof and the cost involved.”

Global initiatives and milestones

Globally, central banks are making strides towards implementing CBDCs. The Swiss National Bank, for instance, recently announced plans to issue a wholesale CBDC on Switzerland's digital exchange as part of a pilot program. Meanwhile, the European Central Bank (ECB) is steadily progressing towards launching its digital euro pilot, potentially setting the stage for a full-scale launch in 2028. “You need big use cases to make CBDC a success,” stated Ulrich Bindseil. “This is why the ECB decided that a digital euro should cater for P2P, POS and eCommerce payments. To distribute the digital euro, you must collaborate with banks and non-bank payment service providers. There need to be limits on how much digital euro you can hold. And privacy is a crucial topic.” China has already initiated pilot testing involving a staggering 260 million people, while India and Brazil plan to introduce their digital currencies in the coming year.

The power of a correct implementation

Implementing CBDCs is a multifaceted endeavour that central banks worldwide are experiencing sooner or later. Indeed, as Lee Braine, Managing Director, Chief Technology Office at Barclays, stated: “For CBDCs, you need control, interoperability and functional consistency.”  Furthermore, CBDCs must strike a delicate balance between innovation and stability, with Neha Narula, Director of the Digital Currency Initiative at MIT, suggesting that there must be a “balance between functional consistency and having room to experiment.” Central banks must navigate the complexities of digital currency adoption while ensuring financial systems remain secure and resilient. Regulatory frameworks must be established to safeguard against fraud, money laundering, and other illicit activities. Privacy concerns must also be addressed to protect individuals' personal information.

Central banks must collaborate closely with industry stakeholders to develop user-friendly CBDC platforms and ensure interoperability with existing payment systems. Education and awareness campaigns are vital to inform the public about the benefits and safe usage of CBDCs. By actively engaging industry experts, fostering innovation, and prioritising security and education, central banks can lay the foundation for a successful and inclusive CBDC implementation that benefits society.

The promise of CBDCs

Should CBDCs prove successful, they could offer myriad advantages. They can potentially provide the general public access to the most secure form of currency - a direct claim on a central bank. This, in turn, could foster diversity in payment options, expedite cross-border transactions, enhance financial inclusion, and even facilitate fiscal transfers during economic turmoil. The CBDC question has also led to an explosion in experimentation, leading to fragmentation and complexity. While experimentation brings change and opens avenues for progress, for CBDCs to succeed, it must be tempered with consolidation. Neha Narula suggested that: “there is a fragmentation risk. The time has come to start connecting things.”

In conclusion, Central Bank Digital Currencies are more than just a buzzword; they are a transformative force in the world of finance. The debate over CBDCs remains abstract, with broad discussion over various considerations. As central banks worldwide continue to explore the possibilities of CBDCs, Worldline remains committed to staying at the forefront of this digital revolution, adapting our services to meet the evolving needs of our clients and the broader financial ecosystem. In this context, Worldline participates in the offline digital euro front-end prototype testing, as part of the ECB investigation exercise. We also participated in the BIS Project Rosalind, exploring how central banks could address the need for an API layer for retail CBDC Payment involving both public and private sectors. The journey towards the digital horizon is an exciting one, and CBDCs are a significant mile-marker along the way. Stay tuned for more insights and updates as we navigate this transformative era together.