Dr Pooja Lekhi, Vice Chair, Department of Quantitative Studies, University Canada West
Central Bank Digital Currency (CBDC) is an electronic form of currency issued by a central government that citizens can use to make digital payments and store value. If a country issues a CBDC, its government will consider it to be legal tender, just like fiat currencies; both CBDC and physical cash would be legally acknowledged as a form of payment and act as a claim on the central bank or government.
CBDC Benefits over Fiat Currency
One of the biggest advantages of Central Bank Digital Currency is an increase in the safety and efficiency of both wholesale and retail payment systems. A central bank’s digital currency facilitates the quick settlement of retail payments andhas the potential to improve the efficiency of POS (point of sale) and P2P (peer-to-peer) payments.
In addition to domestic transactions, the current cross-border payments model depends heavily on central banks operating the real-time gross settlement (RTGS) infrastructure within which all local banks’ obligations must settle. Due to the existence of time lags in cross-border payments, participating parties are exposed to settlement and credit risk. A CBDC can eliminate counterparty credit risk, and the use of digital currencies in cross-border transactions can be cost-effective. This implies several advantages of CBDC over traditional money, including higher transaction speeds, tangible reduction of fees and automation of payment systems, and increase of their usability.
Advantages of CBDC over cryptocurrencies
The unique feature of CBDC is that it is backed by central bank deposits or a government pledge – they offer stable value and the benefit of regulatory stability and audit transparency.
Traditional cryptocurrencies, like Bitcoin, involve complete decentralization and lack of control by any regulatory authority. CBDCs do not completely rely on decentralized technologies. They are administered by central bank agents and distributed via digital ledger technology. The technical support is carried out centrally.
Countries exploring CBDC
The People’s Bank of China is one of the first central banks to develop a CBDC. They deployed a special task force in 2014 to research and implement a digital yuan. China’s digital yuan can now be used for wealth management products and bank loans. This move by China’s central bank extends the use of digital currency beyond the purchase of consumer goods
In 2017, the world’s oldest bank, Swedish Riksbank, began its CBDC project called e-krona. In collaboration with Accenture PLC, a pilot took place between 2020 and February 2022. E-krona was launched with the purpose of offering a robust alternative in case of emergency or turmoil of private payment service providers, thereby ensuring the Swedish payment system remains stable.
The Bank of England and Bank of Canada are still investigating integrating CBDC into their financial systems.
Other countries which are in a pilot phase of a central bank digital currency include Russia, Thailand, Malaysia, South Korea, the United Arab Emirates and Saudi Arabia.
Concrete plans to launch a CBDC are recorded by the Atlantic Council tracker in Canada, Australia, Brazil and India, among others.
“Around 100 countries are exploring CBDCs at one level or another. Some researching, some testing, and a few already distributing CBDC to the public,” said Kristalina Georgieva, IMF Managing Director
Introducing CBDCs worldwide has the potential to change the future of money. Firstly, it might raise crypto adoption as people will have access to the platforms to convert cryptocurrencies into legal tenders. Furthermore, countries are seeking to preserve key aspects of their traditional monetary and financial systems while experimenting with new digital forms of money to give users more convenience, safety and efficient services. As regulators and central banks take concrete steps and measures in the direction of establishing CBDCs, the world will begin to embrace digital currencies as a standard.
Dr. Pooja Lekhi, Vice Chair, Department of Quantitative Studies, University Canada West.
Pooja Lekhi, PhD, is an experienced professional with more than nine years of experience in teaching and research in business administration (management), with a specialization in finance. With her strong academic background and understanding of appropriate teaching and assessment methodologies, she’s able to clearly communicate complex technical and financial concepts to others. She teaches both management and finance courses. Her research interests include analyzing asset quality management practices in banks, analyzing the loan and investment portfolios of banks, cryptocurrencies, financial technologies, open banking, and other finance-related trends.