Central bank digital currencies: an age-defining shift in the monetary system?

A recent increase in interest has seen many countries bring forward analysis and trials for central bank digital currencies (CBDCs). Given the complexities involved, we ask: why the rush?

Several factors are driving the push toward CBDCs, including:

  • The declining use of cash, exacerbated by the Covid-19 pandemic
  • Potential enhancements to the safety and efficiency of the payment system
  • Many central banks have referred to advantages in the conduct of monetary and fiscal actions
  • The emergence of token-based money such as Facebook’s Diem, alongside China’s significant progress, have spurred western central banks to accelerate their work on CBDCs

A new form of sovereign money that is quick and efficient to use has potentially massive implications

A CBDC can: 

  • Provide businesses and households with a new form of sovereign money and a new way to make payments
  • Be as safe and credit-risk-free as physical cash, but more convenient to use
  • Undermine the informal economy, improving tax receipts
  • Design is crucial in determining outcomes

The implications of CBDCs

  • The introduction of CBDCs is likely to result in some substitution away from other forms of money. This threatens to disintermediate banks and create direct competition with other e-money payment systems
  • CBDCs could become the conduit through which monetary and fiscal policy is loosened and delivered, with both “People’s Quantitative Easing” and deeply negative interest rates a possibility 
  • Although CBDCs could undermine bank deposit bases, there are potential opportunities in ancillary services such as custody and cross selling 
  • CBDCs could hasten the demise of the US-dollar-based international monetary and financial system

Winners and losers?

  • Without question, all global banking systems will face challenges if CBDCs are implemented in the purest retail form
  • There will be winners and losers across jurisdictions, and much will depend on banks’ ability to scale up infrastructure to meet potential demands, giving tech-savvy banks an initial advantage

The development of CBDCs is moving very quickly and mass rollout is within our investment horizon

“A 2021 BIS survey of central banks found that 86% were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects”

BIS, BIS Innovation Hub work on central bank digital currency (CBDC)