Word of the Week: CBDC
Updated: May 3
Prepared by Shelly Forde
Over the last few years, central bank digital currency (CBDC) has become a highly relevant financial-sector topic worldwide. They have the potential to disrupt the industry but also there may be associated risks involved.
Central Bank Digital Currencies Defined
With "central bank" in the name of central bank digital currencies (CBDC), a definition of a
central bank is good to start with. A central bank is an independent national authority that conducts monetary policy, regulates banks, and provides financial services including economic research. Its objectives vary by country and state but often include to stabilize the nation's currency, keep unemployment low, and prevent inflation. This authority is an institution that additionally manages and oversees their commercial banking system. a central bank possesses a monopoly on increasing the monetary base. A central bank is also referred to as a reserve bank or even a monetary authority.
Not every country has a central bank, so it is not surprising that even fewer have a CBDC. It
would stand to reason that a central bank would precede the establishment of CBDC and
the creation of digital tokens produced at a national level. Essentially, CBDCs are digital
tokens issued by the central bank and are generally equivalent in value to the country’s fiat
currency and considered as legal tender.
There are two main types of CBDC:
(1) wholesale CBDC, for which access and circulation are restricted to predefined classes of agents (typically banks and other select financial institutions) under specific regulatory and policy requirements, as is the case today with central bank reserves; and
(2) retail or general-purpose CBDC, for which access and circulation are open to a wider class of agents, including individuals.
CBDC Risks & Benefits
The US Federal Reserve and Eastern Caribbean Central Bank, among many others, reported
issues and concerns surrounding CBDC.
There is much concern surrounding citizen’s resistance to digital and technological advances
Citizens, as well as governments, have expressed hesitation regarding the true ability to
secure privacy and offer protection.
The riskiness and volatility frequently debated in association with digital currency raises
further concerns of its monetary influence given the equivalency to fiat currency.
According to the World Bank, the introduction of CBDC could disrupt the existing financial intermediation structure. In addition, depending on design and country context, CBDC could pose risks to financial stability, financial integrity, data protection and privacy, and cyber resilience. Further, it can have implications for the legal and regulatory framework, increased responsibilities of the central bank, and could also lead potentially to currency substitution, especially in the context of cross-border CBDC.
It is also worth noting that CBDC could potentially help fill the gap in traditional payment systems and promote financial inclusion. "To meet the financial inclusion challenge, however, CBDC would have to be designed with that objective in mind. CBDC design aspects that encourage financial inclusion include the affordable cost of onboarding and transaction, off-line capabilities, privacy, and remuneration. A CBDC system needs to be easy to access through a simple user-enrollment process, convenient to use through a large network of agents and service providers, and acceptable for daily-life use cases at merchants."
Central Banks and countries daring to pilot CBDC programs
Many central banks have pilot programs and research projects intending to determine the viability and usability of a CBDC in their economy. As of April 2022, there were nine countries and territories that had launched CBDCs.
Antigua and Barbuda
St. Kitts and Nevis
St. Vincent and the Grenadines
Reshaping Norms: A New Way Forward, World Bank