Central Bank Digital Currencies (CBDCs) – a global perspective

This blog examines the progress of Central Bank Digital Currencies (CBDCs) worldwide and the likelihood of their implementation on a global basis in the near future. Since the beginning of 2023, the majority of central banks around the world have actively begun exploring or developing CBDC initiatives, with notable progress observed in large economies such as China, India and across Europe. However, several challenges exist, ranging from technological and regulatory hurdles to meet economic considerations and public adoption are hindering the seamless development and integration of CBDCs more widely.

What are CBDCs? 

CBDC stands for ‘central bank digital currency’ – a digital form of a country’s national currency that is issued and regulated by the country’s central bank. CBDCs are essentially a digital representation of a country’s physical currency (such as banknotes and coins) but in an electronic or digital form. However, unlike decentralised cryptocurrencies, such as Bitcoin, CBDCs are centralised and typically issued by the central monetary authority of a specific country. 

Key features of CBDCs 

  • Centralised issuance: CBDCs are issued and regulated by the central bank of an individual country, distinguishing them from decentralised cryptocurrencies that operate on distributed ledger technology but are only ‘governed’ by the market. 
  • Legal tender: CBDCs are considered to be legal tender, just like physical currency. People and businesses can use them for various transactions, and they hold the same legal status as traditional forms of money. 
  • Digital form: CBDCs exist in electronic or digital form, stored in digital wallets or other electronic devices. This allows for faster and more efficient transactions, especially in the digital economy. 
  • Government backing: CBDCs derive their value and legitimacy from the backing of the government or central bank. They are considered a liability of the central bank and are typically fully backed by the country’s reserves. 
  • Controlled supply: Each central bank has control over the issuance and supply of their CBDC. This enables the central bank to implement monetary policies effectively and respond to economic conditions. 

Likelihood of CBDC implementation 

With 86% of central banks actively investigating the potential of CBDCs according to the Bank for International Settlements, the likelihood of a number of countries adopting CBDCs in the not-to-distant future is significant. China, with its digital yuan boasting over 120 million wallets, and India, in the pilot phase since late 2022, are leading the way. The UK is in pilot phase and even smaller economies have made strides, indicating a global trend toward CBDC implementation. 

Challenges with CBDC development 

Whilst there is great interest and a move towards CBDCs in many countries, there are also a number of challenges with their implementation, requiring local and international co-operation. 

Technological challenges 

  • Development of secure, efficient and scalable digital currency systems 
  • Management of cybersecurity, interoperability and handling of substantial transaction volumes 
  • Co-existence with traditional currencies, backward compatibility and technology choices 

Regulatory and legal challenges 

  • Establishing a legal framework governing CBDC issuance and regulation 
  • Addressing privacy, data protection and compliance with international financial regulations 
  • Providing clear legislation concerning programmable money 

Economic considerations 

  • Assessing potential economic impacts on monetary policy, financial stability and the banking sector 
  • Caps on wallet holdings, the non-interest-bearing nature, and implications for public acceptance 
  • The decision not to implement CBDCs could be detrimental for central banks in terms of monetary policy and governance 

 Public adoption 

  • Building public trust and acceptance through addressing privacy concerns 
  • Requirement for public education initiatives to clarify the benefits and proper usage of CBDCs 

 The inevitability of CBDCs 

The inevitability of CBDCs is the subject of much ongoing debate. The global trend towards digitalisation, the popularity of cryptocurrencies, and the benefits which digital currencies can bring, all suggest a shift towards CBDC adoption. Enhanced settlement efficiency, smart contract utilisation, and improved financial inclusion are clear advantages of CBDCs. Whilst challenges still persist, the increasing momentum towards digital currencies suggests that CBDCs are very likely to become a significant part of the global financial landscape in the medium to long term. 

Conclusion 

The global landscape is witnessing a substantial shift towards the implementation of CBDCs. Whilst challenges exist, the benefits of digital currencies and the evolving financial ecosystem suggest that CBDCs are not only likely, but may become an integral part of future financial system. Addressing technological, regulatory, economic and public adoption challenges will be crucial for successful CBDC implementation on a global scale. 

Discover more about CBDCs and all things DLT and blockchain during our GFT webinar on 28 November 2023: ‘Digital Assets – The Next Generation of Finance?’. Register now here 

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