Is Central Bank Digital Currency the future of money

Since the creation of Bitcoin in 2012, the crypto space has come a long way to now become the building ground of a new digitalized form of our social and economical realm. Indeed, everyday new use cases are found by crypto enthusiasts aiming to enhance the efficiency and transparency of the current process be it in life science with the new genomic gold rush led by the new CRISP technology or pure economics with the recent boom of the DeFI space reinventing our current global financial model in a more decentralized manner in order to get rid of the current barrier of entry for many economical agents.

As such, now that the industry has finally grew out of its initial anarchist infancy, it isn’t surprising to see central banks such as the Bank of England (BOE) starting to experiment with this new blockchain technology and think about the possibility of implementing a blockchain based currency into their set of tools in order to grasp all its advantages and get a tighter grip on this whole new ecosystem by becoming an inherent part of it.

But, first what is a CBDC exactly ?

As stated by the recent CBDC report from the BIS, a CBDC can be defined as a digital payment instrument, denominated in the national unit of account,  that is a direct liability of the central bank. As such, CBDC is a form of central bank money that is different from balances in traditional or settlement accounts. Indeed, nowadays, central banks only issue two types of money :

• Physical cash
• Electronic central bank deposits also known as reserves or settlement balances

While providing infrastructure for private money principally available through widely accessible and electronic commercial bank deposit. However, as you can notice here in the case of a general purpose CBDC the central bank will have to issue it but also support and create the underlying system allowing to provide and distribute it conveniently to the public. This last point being the most complex given the complexity of our current global financial system.

What is the added value of CBDCs ?

First and foremost, a CBDC could act as an additional payment method, improving operational resilience and enhancing distribution and use of fund in remote area. Indeed, in jurisdiction, where access to cash is in decline for numerous reasons, a CBDC could act as a digital banknote and ensure that households and businesses have a reliable access to risk free central bank money. Plus, the emergence of a CBDC could at the same time provide an effective mean to transfer value between the fragmented closed loop systems build by payment service providers and increase the overall efficiency of the global payment service market.

The second big benefits from the emergence of CBDCs would be the drastic improvement of cross-border payment. Indeed, by using the blockchain technology, bank would be able to switch from the slow and costly SWIFT process to a nearly instantaneous process costing only a fraction of the current cost of the current cross-border payment opening as such a whole new landscape of opportunities on the retail side.

Finally, the third main benefit of a CBDC is its power as a monetary policy tool. Nonetheless, much more research has to be made on this part due to its potential downsides. Indeed, theoretically, a remunerated CBDC could be used to  pass on policy rate changes immediately to CBDC holders if it was to pay competitive rates and allowed to be held in sizable amounts by public agents. However, it could also exacerbate financial stability risks associated with bank disintermediation by reviving the runs on central bank money during crisis while blurring altogether the separation between monetary and fiscal policies.

What is the current state of CBDCs around the world ?

For the most part, central banks are still in the phase of experimental studies and only focus on specific use cases or publish research papers on the current state of the technology and its potential application at the central bank level without really building any real-life token. However, in the case of China, the situation is totally different as the People’s Bank Of China (PBOC) unveil recently that on top of successfully creating its very own CBDC called digital Yuan, the token recently successfully sustain its first trial in October and was currently going under a new trial in Suzhou. In this new trial, 100,000 chosen people, where users will be able to buy goods with their tokens by just touching their Huawei smartphones simultaneously with the vendor or use the JD webstore making at the same time JD the first private company to ever support a CBDC. On top of that, the PBOC and the Honk-Kong monetary authorities are currently working hand in hand to launch technical trials of cross-border payments using the currency which if successful could very well be a new blow from the Chinese government at dollar supremacy.

To conclude, as we can see CBDC still present many challenges especially on the policy side and most of its potential downsides are still unclear for now and will most certainly have to hit the economy first in order for the theory to catch up and take them into account (bank run, 2008 crisis…). However,  as with any new technology the first central bank able to create a full fledge CBDC infrastructure will enjoy a gigantic first mover advantage and will most certainly shape the form of the new digitalized economic infrastructure for the years to come by detaining one of the main if not the world currency reserve as the US did during the 20th century.