The Ascent of CBDCs

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The Ascent of CBDCs

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Bibliographic details

• Authors: ANDREW STANLEY
• Published: September 1, 2022

Overview and definition

• Central bank digital currencies (CBDCs) are digital versions of cash that are issued and regulated by central banks.
• CBDCs are described as more secure and inherently not volatile, unlike crypto assets.
• More than half of the world’s central banks are exploring or developing digital currencies.

History and current status

• CBDCs have been around for three decades.
• In 1993, the Bank of Finland launched the Avant smart card, an electronic form of cash, considered the world’s first CBDC; the system was eventually dropped in the early 2000s.
• As of July 2022, there were nearly 100 CBDCs in research or development stages and two fully launched:
  • eNaira in Nigeria, unveiled in October 2021.
  • Bahamian sand dollar, debuted in October 2020.

Motivations and potential benefits

• Primary motivations cited:
  • Promote financial inclusion (for example, The Bahamas sought to serve unbanked and under-banked populations across more than 30 of its inhabited islands).
  • Improve the efficiency and safety of payment systems.
• Potential benefits highlighted:
  • Create greater resilience for domestic payment systems.
  • Foster more competition, which may lead to better access to money.
  • Increase efficiency in payments and lower transaction costs.
  • Improve transparency in money flows.
  • Could help reduce currency substitution (use of a foreign currency in addition to, or instead of, a country’s own).

Risks, constraints, and policy considerations

• Central banks must determine whether there is a compelling case to adopt CBDCs, including whether there will be sufficient demand; some central banks have decided not to adopt them for now, and many are still grappling with this question.
• Issuing CBDCs involves risks that central banks need to consider:
  • Users might withdraw too much money from banks all at once to purchase CBDCs, which could trigger a crisis.
  • Capacity to manage risks posed by cyberattacks must be weighed.
  • Ensuring data privacy and financial integrity is a critical concern.

F&D Magazine — ANDREW STANLEY, September 2022

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