CBDCs: A New Era for Digital Cash and Crypto Payments
Central Bank Digital Currencies (CBDCs) are on the verge of transforming global finance. Designed to function as digital cash issued by a central bank rather than by private entities or commercial banks, they promise to reshape everything from cross-border transactions to everyday payments. The impact on crypto payments could be huge, opening a new chapter in the digital economy.
Here are some key takeaways that this article will cover:
Central bank digital currencies (CBDCs) are a kind of digital money issued by a central bank.
CBDCs offer financial inclusion benefits and possibilities to streamline and secure payment systems.
Many countries are considering CBDCs and exploring how these may affect their economies, financial networks, and stability.
Some people mean that CBDCs could be a potential threat to economic freedom.
Let’s dive into what it means for merchants!
The Purpose of CBDCs
The goals behind CBDCs encompass several strategic aims that central banks see as essential in today’s evolving financial landscape. Primarily, CBDCs are envisioned as tools to enhance financial inclusion, providing digital payment options to people without access to traditional banking. CBDCs are digital forms of national currencies and are regulated by central banks. Their purpose is to expand accessibility to financial services and lower the maintenance costs of current monetary systems. With this backing, they carry the weight of legal tender and are seen as potential tools for modernizing financial systems, improving inclusivity, and maintaining economic stability.
Beyond inclusivity, CBDCs offer the potential to streamline and secure payment systems. By reducing reliance on intermediaries, they could make transactions, especially cross-border ones, faster, more cost-effective, and safer. In a world where private cryptocurrencies like Bitcoin and stablecoins are gaining influence, CBDCs present a way for central banks to maintain control over monetary policy. With this digital infrastructure, they can also bolster transaction security and traceability, using blockchain to add transparency and help curb financial crime.
As the economy moves toward digitalization, CBDCs provide central banks with a tool to keep national currencies relevant and adaptive. They could even become pivotal in managing economic crises, offering a direct channel for stimulus that puts money directly into consumers' hands, bypassing traditional banking routes. Together, these objectives reflect a vision for CBDCs as more than just digital money, positioning them as instruments of financial resilience and modernization.
Types of CBDCs
CBDCs come in two main forms:
Retail CBDCs: Designed for everyday use by the general public, retail CBDCs are intended to serve as an alternative to cash and conventional bank accounts.
Wholesale CBDCs: These are restricted to financial institutions for large-scale transactions, potentially making interbank settlements faster and cheaper.
A glimpse at global projects
Over 130 countries are at this moment considering and investigating the opportunity for CBDCs. Here’s a look at some leading projects:
The Bahamas, Jamaica, and Nigeria have already introduced CBDCs. And more than 100 countries are in the exploration stage. Central bankers in Brazil, China, the EU, India, and the United Kingdom are at the forefront.
Although many countries are considering the possibility of implementing CBDCs, few have taken definitive action. For example, in February 2023 the Bank of England declared that "a digital pound is likely to be needed in the future", with the caveat that it has yet to make a decision.
In March 2022, the U.S. government prioritized exploring the design and implementation of a CBDC, urging rapid research and development on a potential digital dollar. Six months later, it released a framework outlining key considerations for such a launch. By December 2023, however, the U.S. still hadn't made a final decision on whether to proceed with a CBDC. Meanwhile, stablecoins like USDT, or Tether, already exist as digital assets pegged to the US dollar. Issued by private entities rather than central banks, these stablecoins maintain a value equivalent to the dollar but lack the government backing and regulatory oversight that a CBDC would have.
CBDC VS USDT
So if a CBDC is a government-based currency, can you call USDT a CDBC then? The answer is no, USDT is not a CBDC. USDT is a stablecoin, meaning it is a type of cryptocurrency that is pegged to a stable asset, in this case, the US dollar, to maintain a consistent value. It is issued by a private company, Tether Limited, and is not backed or issued by any central bank. In contrast, a CBDC is a digital currency issued and regulated by a country’s central bank. CBDCs are government-backed and carry the legal tender status of the issuing nation’s currency, such as the U.S. dollar if issued by the Federal Reserve. CBDCs are designed to function as official state currency, unlike stablecoins like USDT, which operate in the decentralized cryptocurrency space without central bank oversight.
Sweden’s E-krona
The Swedish national bank is investigating a digital supplement to cash, the so-called E-krona. E-krona would be Swedish digital currency issued by the national bank. They would therefore be government money, just like cash, and the difference is precisely that they would be digital and therefore could be used for more types of payments than cash. Sweden's national bank has developed a prototype for the E-krona and conducted extensive testing, as Sweden explores the possibility of introducing its own CBDC, although no official launch date has been established yet.
While the e-krona is intended to complement cash it could play an essential role in Sweden’s financial landscape by ensuring that government-backed payment options remain available alongside private alternatives.
How CBDCs could transform the crypto payment landscape
CBDCs add a new layer to digital payments, impacting merchants and crypto payments in several ways. Competing with private cryptocurrencies, especially for everyday transactions, CBDCs could become the more stable, user-friendly choice, backed by government infrastructure, making them appealing to consumers and merchants alike for their security and legal acceptance.
Merchants already accepting crypto may need to consider adding CBDCs, balancing the benefits of faster transactions and transparency with the potential costs of system updates and staff training. For those reliant on stablecoins, CBDCs could present a challenge. State-backed and stable, CBDCs might reduce demand for private stablecoins, particularly for cross-border transactions, where merchants may favour the simplicity and legal backing of CBDCs. CBDCs could reduce reliance on stablecoins for international transactions, as they offer inherent stability and are backed by central banks.
The downside of CBDCs
While some might consider the implementation of CBDCs as something great, others might disagree. Merchants may be wary of CBDCs due to concerns about privacy and control. CBDCs could require full transparency in transactions, potentially deterring customers who value their financial privacy.
The state control inherent in CBDCs could limit flexibility, particularly for international transactions that rely on the decentralized nature of cryptocurrencies. With regulatory oversight, CBDCs might introduce restrictions on consumer spending, meaning that every individual is only allowed to spend a decided amount of money on something, raising concerns about how they could affect sales.
BIS (Bank for International Settlements) General Manager, Augustín Carstens states: “The key difference with the CBDC is the central bank will have absolute control on the rules and regulations that will determine the use of that expression of central bank liability, and also we will have the technology to enforce that”
The road ahead for CBDCs and the crypto market
As CBDCs advance from research stages to implementation, they promise to offer accessible and secure digital financial systems for consumers and businesses alike. With key features like privacy, transferability, and reliability, CBDCs could empower millions who lack access to traditional banking, allowing them to save, receive payments, and settle bills securely. Beyond inclusion, CBDCs have the potential to streamline complex financial infrastructures, reduce cross-border costs, and create more affordable options for those who rely on alternative money transfers.
With three countries already implementing CBDCs, the journey is only at its beginning.