Central Bank Digital Currencies (CBDCs) are potentially one of the most significant innovations in the evolution of money. In this report*, we explore different aspects of CBDCs and their impact on the future of money.
We examine the future mix of CBDCs, stable coins and crypto currencies and how they will co-exist alongside other traditional digital and physical currencies. Rather than being a zero-sum game, the presence of CBDCs will grow the overall footprint of digital currencies in the economy.
Furthermore, even though CBDCs are currently the focus of macro-economic debate, we anticipate that the ripple effects will soon trickle to businesses and customers. Specifically, in this report, we explore the potential impact of CBDCs on financial institutions, such as banks.
There is no doubt that Central Bank Digital Currencies (CBDCs) are in the spotlight. From mainstream media to policy makers and from regulators to bankers, there is growing discussion about this new payment technology. In fact, according to the Bank for International Settlements, 85% of the central banks in the world are currently either studying or piloting CBDCs. So, what’s behind the big buzz and what are the key points one can take away? While CBDCs are a complex topic and their narrative is still developing, in this report we take a broad view of their key features and the main scenarios that are likely to emerge in the coming years.
Types of Central Bank Digital Currencies (CBDCs)
There are two types of CBDCs: Wholesale and retail central bank digital currencies. We’ve listed some of the main features of each below.
Wholesale CBDCs use the existing tier of banking and financial institutions to conduct and settle transactions. These types of CBDCs are just like traditional central bank reserves.6
One type of wholesale CBDC transaction is the interbank payment. It involves the transfer of assets or money between two banks and is subject to certain conditions. This transfer comes with considerable counterparty risk, which can be magnified in a real-time gross settlement (RTGS) payment system.6
A digital currency’s ledger-based system enables the setting of conditions, so a transfer won’t occur if these conditions are not satisfied. Wholesale CBDCs can also expedite and automate the process for cross-border transfers.6
Current real-time settlement systems mostly work in single jurisdictions or with a single currency. The distributed ledger technology (DLT) available in wholesale CBDCs can extend the concept to cross-border transfers and expedite the process to transfer money across borders.6
Wholesale CBDCs improve upon a system of transfers between banks. Retail CBDCs, on the other hand, involve the transfer of central government-backed digital currency directly to consumers. They eliminate the intermediary risk or the risk that banking institutions might become illiquid and sink depositor funds.
What is the future of money?
Everything has its own time. Everything sprouts, grows, withers, and disappears. This is the cycle of life – and the same process also applies to money and the way you obtain it.
Our perception of money – how it is earned and its value – is undergoing a major change.
You open your wallet and see a dime. The coin is physical, you can pick it up and hold it in your hand, and you are confident that it actually has a value of 10 cents. In a few years, you will most likely be holding a small plastic item shaped as a heart or a star, or you might not even have a wallet and only have access to a virtual currency, which you do not know what looks like. You have to be prepared for a financial revolution in the next 10 to 15 years.
Money, as we know it, has only existed for a relatively few years – the first banknote was printed in France in the 17th Century. More, recently, however, currencies have started to disappear; more than 600 in the last 30 years, and the trend continues.