Central Bank Digital Currencies (CBDCs) are at the heart of plenty of heated debates around the future of the world’s financial services. 

Many banking experts and industry leaders are exploring the ramifications of embracing a digital currency – both positive and negative – but the sector appears to be on the verge of a tipping point – now it looks increasingly a matter of ‘when’ rather than ‘if’ they will be adopted. 

According to PwC, more than 60 central banks have explored and researched CBDCs since 2014. Institutional involvement in CBDCs continues to strengthen the wider ecosystem with public stakeholders such as the Bank for International Settlements, the World Bank, the International Monetary Fund or the World Economic Forum, all active in their research and development. 

What are CBDCs?

“CBDCs will be a game-changer, providing access to alternative payment solutions for citizens and corporates, as well as reinventing financial market settlement and interbank monetary transactions.” (Benoît Sureau Partner Financial Services Risk and Blockchain PwC France & Maghreb). 

A CBDC will be a new digital currency issued by a central bank. Essentially, they will take the form of electronic cash. So in the UK, this currency would be issued by the Bank of England (BoE) and allow households and businesses to directly make electronic payments. 

The BoE, like so many other central banks, is currently researching this area and is keen to emphasise that it has yet to make a decision on whether to proceed with the introduction of this electronic currency.

What has accelerated interest in CBDCs?

Central banks work to represent the public and their financial interests and during the last year, with concerns around the spread of Covid-19, many of us have begun to use less and less cash. With increased interest in other digital cryptocurrencies, central banks are now working harder to ensure they can retain their grip on economic stability and the monetary supply.

China is leading the way with the adoption of CBDCs. In October 2020, China’s central bank issued 10 million yuan (£1.1m) worth of digital currency to 50,000 people in the Shenzhen area via a lottery. Two million residents applied to join the scheme demonstrating the scale of interest in this new financial world. 

In China, this widespread adoption is driven by the close working relationship traditionally seen between big tech companies in the private sector and the government. This is in sharp contrast to the US where the country is fragmented and there are a larger number of market players involved. However, again it is partly thanks to the Covid-19 pandemic that there has been increased interest in this area in the States. The Federal Reserve has been working with MIT in the form of Project Hamilton to explore and expand a CBDC at pace. This time the effort is on a retail CBDC whereas previously it was at a wholesale level.

According to the authorities, they plan to review CBDCs this year so the ability to transact, secure and respect consumer privacy within a US perspective is addressed. 

How will this impact the banking system

The adoption of CBDCs will lead to a potential evolution of currency. Banks will still have a role to play as competition is healthy for the market and the Federal Reserve will not be looking to switch off physical cash flow at any point. However, it does mean commercial, retail and wholesale banking will have to adapt the most at the pressure points of service and distribution.

One of the biggest changes from a CBDC would be greater financial inclusion and cheaper cross-border payments. However, this would lead to potential issues around privacy and data security.

At the same time, CBDCs could also support households and businesses in making fast, efficient and reliable payments benefiting from a new, innovative, competitive and inclusive payment system. This way, a CBDC could also help to meet future payments needs in the digital economy by harnessing the potential of these new forms, new features in money. It could be beneficial in democratising access to cash all backed up and supported by a central intermediary. 

What do CBDCs mean for fintechs

Fintechs have always been ready for disruption and the arrival of CBDCs could be as much of an opportunity as a challenge. There are design considerations as to whether this would utilise blockchain technology but if this is the case, then it could enhance the resilience and availability of the currency. At the same time, concerns around privacy and cybersecurity also need to be addressed. 

The future of CBDCs

Ultimately, CBDCs are still some way off both in the US and UK. Generally, consumers are more concerned than ever about their data, how it is used and stored and have little trust for authorities. 

Central banks have also failed in many ways – they have not maintained financial stability, let consumers down with their economic policies and failed to save the high street. And if deployed correctly, then CBDCs could be positive – the general public would retain access to the safest form of money – a claim on a central bank. This could promote diversity in payment options while making cross-border payments faster and cheaper. With so many elements surrounding the debate amid the backdrop of the pandemic, it’s easy to see how the issue of CBDCs has caused such discussion. Whatever the pros and cons, this is coming towards us – although its impact remains to be seen…