35. What is CBDC – central bank digital money?
We are witnessing that money is no longer cash. It is becoming more online and digital. Will cash become a thing of the past? Who knows? The CBDC’s new central bank money will improve financial inclusion at the same time, but it also confronts us with a kind of threat. What’s more, Central Banks are considering their issuance of digital currency. So, what is CBDC?
As the name implies, digital currency is electronic money rather than the physical currency we have dealt with so far. The digital currency of a central bank is an electronic version of its native currency – the dollar, euro, zloty, yuan, etc.
As the Central Bank in the UK explains, 10 paper pounds will be worth the same as 10 pounds of British electronic currency.
The central banks of a country are responsible for issuing and managing CBDCs. They are the peculiar “authorities” of a country, regarding monetary policy. At the same time, they guarantee that digital money is devoid of any risk.
Many Central Banks also emphasize that CBDCs do not have as much volatility than private cryptocurrencies such as Bitcoin, Ethereum, or Ripple. Why? Because, as the banks justify, digital currency is tied to a country’s national currency.
Interestingly, according to the USC Federal Reserve, CBDC will be “the safest digital asset available to the public without credit or liquidity risk.” Well interesting.
How does central bank money work?
The digital currency of the central bank is to be stored in an account or in the form of electronic tokens. As a result, to pay for their purchases, for example, people will not use cash or cards, but transfers and tokens.
Electronic tokens would be stored on mobile devices, prepaid cards or in the form of a digital wallet. The Central Banks also emphasize that the CBDC would be used by financial institutions and even businesses!
Advantages of CBDC
- Privacy. It is to be the most important feature of CBDC and the entire related project. The digital currencies are to be configured in such a way as to ensure the protection of user data, right from the design stage.
- Greater control of personal data and security. According to CBDC researchers, if the development of digital currencies follows a data-protection-by-design and by-default approach, digital currencies will enhance data protection and security for all digital payments. At the same time, they will give payers control over their personal data.
- Anonymity in the payment process. Digital currencies are to use technologies that enhance the entire anonymity process. Interestingly, all anonymity is at the same time to enable control in illegal cases: money laundering, terrorist financing or non-payment of taxes.
Disadvantages of CBDC
- Our data will be available to Central Banks. Consequently, contrary to the anticipated advantages, our privacy will be at risk. Why? Having such an amount of sensitive data in one place, is a tasty morsel for cybercriminals.
- Poorly chosen technological infrastructure, can expose our data to leakage. And not just at the time of payment, although researchers put the most emphasis on this point. All it takes is a mistake in one algorithm for something to go wrong.
- User trust. And not only that, related to security issues. The vast majority of users are not enthusiastic about CBDCs. Citing the excessive control that regulators would then have over insights into transactions.
CBDC vs. society
Behind the scenes, it is heard that digital currencies will be a fast, easy, yet secure way to make payments, made by users. At the same time, they are supposed to give more choice as to how to pay. They are also supposed to increase financial inclusion.
However – is the secret really out? Consider, for example, the fact that almost 1.7 billion people around the world don’t even have a bank account. Cash is the only form of payment they make.
What’s more, the failure of any payment system or our token application will mean that without cash, we won’t have anything with which to pay a given fee. Considering the above, is CBDC really that friendly to the public?
Of course, central bank digital money is a great way to reduce financial crime. Cash is untraceable, CBDCs are. It is true that digital currencies will improve the transparency of money transfers.
How many countries are considering introducing CBDCs?
According to the Atlantic Council’s Central Bank Digital Currency Tracker, over 100 countries are exploring digital currency.
Some of them, are already in the process of adopting CBDC. These include Nigeria, China, Jamaica, and the Bahamas, among others. Some countries are still exploring digital currencies, and are not committing to introducing them.
CBDC – challenges
There are certainly a lot of them, before the Central Banks. Many societies lack confidence and conviction in digital currency. In Ecuador, lack of trust in the central authority caused the digital currency to be withdrawn three years after its launch.
Another very significant challenge, from the user’s perspective, is cybersecurity. As we wrote above, storing data in one place is a real morsel for hackers. As the World Economic Forum points out, forgery, theft, or network failure can have far greater consequences than in the case of cash trading.
Countries that want to introduce CBDCs, must also have the necessary technical and legal capabilities before they start issuing digital currency on a wider scale.
The subject of CBDC is interested, but it is still developing. Central Banks are not yet fully unified and have no clear idea how to do it on a global scale. What’s more, countries that have already introduced digital currency are having trouble adopting it. The idea does not convince most people. How the topic will develop – we are curious ourselves.