Central bank digital currencies: A tool of the future?

Mar 17, 2022 - 2 min read
Also Available in : Français
Philippe Serafin, Digital Innovation Manager at Sopra Banking Software

The digitization of the world is profoundly changing the payments and banking market. Faced with the urgent need to innovate, central banks are trying to develop their own currencies, which is proving to be a long and difficult process.

In the age of virtual and cryptocurrencies, the financial system’s traditional players must get up to speed or be left behind. Among the areas of research are ‘Central Bank Digital Currencies’ (CBDCs). These are virtual fiat currencies whose value is guaranteed by the central banks that issue them. Designed as an official alternative to cryptocurrencies, they use the same blockchain technology but rely on private networks, whereas decentralized cryptocurrencies rely on public networks.

What are CBDCs used for?

The uses of CBDCs promise to be several. They would, for instance, make it possible to work on a national or supranational level and make cross-border payments without having to use different currencies. They could also facilitate money transfers by eliminating intermediaries, providing a fast and inexpensive means of exchange and improving payments and liquidity. Most importantly, they could secure financial transactions involving digital tokens.

By providing more traceability, they would limit money laundering while providing more consumer protection, security and recourse. In emerging economies, they would foster financial inclusion. JP Morgan estimates that CBDC could even save banks $100 billion in transaction costs. In the transition to a cashless society, central banks should embrace the concept rather than leave the field wide open to big tech companies.

The future of CBDCs

CBDCs first arrived on the market around ten years ago, but a turning point is now underway. It is estimated that 140 million Chinese people are already using the digital Yuan. Nigeria’s central bank recently launched the eNaira; and Peru, Chile and India have all begun their own research. The United States would like to play an important role in the development of international regulations, while the ECB is investigating the development of a digital euro, “which would not replace cash, but would act as a complement.”

140 million Chinese people already use digital Yuan

However, some elements must be clarified in order to efficiently implement CBDCs. The constituent elements of these currencies, minting and redemption issues, conversion terms and exchange operations must be studied, defined and laid subject to strict rules.

It’s also about redefining the role and responsibilities of central banks, commercial banks and service providers in this redesign of trade.

And finally, there remains the problem of cybersecurity, privacy and data protection.

As a result, some are frustrated by the slow pace at which these currencies are being developed. The Bank of England’s digital currency will not be ready before 2025, and the EU has been careful not to give a timetable for its completion. These delays raise another question: what vital need do they really meet? Whatever the answer, one thing is certain: CBDCs are here to stay and will fundamentally change the financial services industry.