Instead of printing banknotes, the central bank issues government-backed digital currency based on its credibility and soundness.
A central bank digital currency (CBDC acronym for Central Bank Digital Currency) is a digital form of a country’s official currency, which directly engages the central bank. Instead of printing banknotes, the central bank issues government-backed digital currency based on its credibility and soundness. It is therefore a different expression of the same unit of account, store of value and medium of exchange already offered by a central bank, which can be widely used by households and businesses.
Growing interest in CBDCs
Changes in payment habits, as well as technological developments, are helping to increase interest in CBDCs. However, the key motivation for them could lie in a central bank defending itself against threats to its monetary sovereignty, as the ability to effectively deploy monetary policy could be weakened by the adoption of private digital currencies such as than cryptocurrencies and stablecoins. This explains why, according to a BIS survey conducted in 2021, 86% of central banks are studying the risks and benefits of issuing a CBDC, 60% are experimenting with different technologies and 14% are in the process of carrying out projects. pilots. Only two countries have officially launched a CBDC so far: Nigeria and the Bahamas. Many countries are conducting pilot projects such as China, Canada, South Africa, Korea and the United Arab Emirates. In the G10, Australia, Sweden and Japan are at the proof-of-concept stage, while the ECB, SNB, BoE and Fed are still at the research stage .
A matter of design
CBDCs must be carefully designed to balance benefits and risks. They must create value for users, foster competition instead of crowding out innovation, and avoid the risks of financial disintermediation. We distinguish between two main categories of CBDCs: wholesale CBDCs and retail CBDCs. The use of wholesale CBDCs is limited to financial intermediaries for the settlement of interbank transfers and large transactions. The difference with standard central bank reserves is the ability to enable new forms of payment conditionality, requiring a payment to meet a specific condition for settlement. Retail CBDCs can be directly held by non-bank actors (private and corporate) as a kind of digital currency, changing the standard two-tier monetary system by making digital currency from central banks available to the public. Emerging economies seem to be leaning more towards retail CBDCs, where financial inclusion and digitalization are the main goals, while developed countries are focusing on wholesale CBDCs, as they have more banking systems and capital markets. developed.
China and the e-CNY
While many countries have recently started looking into the subject, the Central Bank of China (PBoC) has been working on a CBDC since 2014. A pilot project was launched in 2020 in 10 regions and presented at the Beijing Olympics this year. . The digital yuan (e-CNY) is a two-tier retail CBDC system, where the back-end infrastructure is provided by the PBoC, while the front-end is operated by regulated private payment providers (commercial banks and technology companies). There is therefore no disintermediation of the banks. Besides, e-CNY applies a DCEP (Digital Currency Electronic Payment) approach, which means that it is not only a digital currency, but also an electronic payment system. Nearly 260 million Chinese have already downloaded the digital wallet, and 9 million merchants (including Western franchises) have joined e-CNY. According to PBoC officials, e-CNY transactions at the end of 2021 totaled $14 billion.
One of the goals of the PBoC is to increase the efficiency and resilience of the digital payments ecosystem (currently dominated by AliPay and TenPay) by promoting competition and providing an alternative in the event of malfunction. The DCEP approach followed by China will also allow the 20% of the Chinese population that does not benefit from banking services to access them. The e-CNY is currently the largest real-world public test of the effectiveness of a CBDC. Its relative maturity puts China in a position to set standards in CBDC development, which we believe will help this country achieve the end goal of strengthening monetary sovereignty and internationalizing the yuan.
We expect most major central banks to issue a CBDC before the end of the decade, given the powerful social and technological forces at work. While there is no single answer to the motivations and design features of CBDCs, the two-tier model where banks continue to play a role in the ecosystem without being fully disintermediated might be preferred in practice. This approach allows the public to access central bank money, with the risk of financial instability minimized. Whatever the design, CBDC issuance is likely to reshape interbank systems, cross-border payments, and the way monetary policy will be conducted in the years to come.