With current blockchain technology evolving and many countries exploring the use of a cashless system, Central Bank Digital Currency (CBDC) is making headlines. The Atlantic Council—a major American think tank—maintains a web page dedicated to tracking the status of CBDC worldwide, and as of June 2022, it shows that 105 countries are currently exploring a CBDC. This number has jumped from only 35 countries in May 2020. Now, there are 50 countries “in an advanced phase of exploration.” What is pushing so many countries to suddenly consider adopting this new system? A report recently published by the Visa Economic Empowerment Institute, titled “The Art of Public Money: Policy Considerations for Central Bank Digital Currencies,” aims to look at the driving forces and delve into some of the potential challenges policymakers will need to address.
The report cites five of the motivations a central bank may have for introducing a CBDC:
- To maintain the central bank’s effectiveness and independence in monetary policy
As crypto-assets and stablecoins gain popularity, central banks have begun to worry that private digital coins could interfere with monetary policies, leading to a system of “parallel money.” Adoption of a CBDC can therefore serve as an alternative, potentially providing the public with some of the attractive features of crypto while limiting the risks of currencies without central regulation.
- To continue providing public access to central bank money
As cash use declines in many developed countries, a CBDC can complement physical cash while providing access to potentially less risky central bank money to a larger population.
- To increase resilience during crises
Distribution of central bank money has proven difficult, especially for those who do not have access to a bank account. This issue was highlighted during the pandemic with the struggle to efficiently deliver stimulus payments to unbanked Americans. Some have suggested that a CBDC could have sped up the process.
- To drive financial inclusion
If designed and marketed strategically, the implementation of a CBDC could have the power to provide education, resources, and financial services to those who have been historically excluded.
- To encourage competition and interoperability
By acting as a neutral technology platform, a CBDC can encourage public-private partnerships and API integration within the payments ecosystem.
With the introduction of this new form of centralized payment come many risks and challenges that central banks and policymakers must take into consideration. The first challenge is convincing the public to use a new CBDC. Some have argued that a CBDC needs to be designed in a way that allows it to compete with cash’s flexibility, in terms of being available regardless of power outages, natural disasters, or other situations that could lead to service instability. However, creating a CBDC that functions offline could in turn introduce greater security risks. Cybersecurity would be a major concern for a CBDC, as it might naturally become a target for cybercrime. In order to mitigate these risks, systems must be in place that create standards, enforce policies, and monitor network security.
What are your thoughts around how CBDCs will impact businesses and consumers?