In the 2020s, the world’s consumers are faced with two different ways to pay: cash and card.
Both payment instruments have their pros and cons. Cash is anonymous and instant. It’s ‘fungible’ (notes and coins are inter-changeable), and it’s perfect for small transactions/micropayments. Also, cash doesn’t require a battery or a network connection to ‘work’.
Yet cash is bulky and ‘dirty’. It is also vulnerable to embezzlement, while its anonymity makes it the choice of criminals and money launderers.
By contrast, card payments are convenient and clean. They issue instant receipts, and let users track spending and improve budgeting. Digital payment trails also help law enforcement to identify criminals.
But there are downsides. Card payments require battery power and a network connection. They can lock out the unbanked and the ‘digitally excluded’. The potential for surveillance also worries people.
So is there room for a new kind of payment instrument – a form of ‘digital cash’ that combines the advanced features of cards with the instant and universal benefits of coins?
Many believe Central Bank Digital Currency is the answer.
CBDC is an electronic version of notes and coins issued by a country’s central bank. Funds can be issued to all citizens across a range of devices – even loaded a simple plastic card. And because CBDC is controlled by central banks, it could make payments more efficient, improve fiscal and monetary policies and boost financial inclusion.
ċċċ
Today, momentum is building around CBDC. There are worldwide. Meanwhile Juniper Research predicts the value of payments via CBDCs , up from just $100 million in 2023.
Still, the introduction of digital currencies raises questions. There are issues of privacy and inclusion, user interface and design. There is also the challenge of making offline CBDC payments reliable, safe and available to all citizens.
In this page, we will explore these issues and provide an overview of the current landscape.
CBDC: Why now?
Today, central bank money takes two forms: physical banknotes and reserves held by financial institutions. This money is hugely important because it underpins financial stability. In most cases people can exchange their bank balances for notes and coins. This gives citizens a degree of trust in their country’s money. We can see this when there is a ‘run on the bank’ and customers rush to turn their ‘risky’ bank deposits into ‘safe’ cash.
But now the way people pay for things is changing. The biggest shift is that consumers are reducing their use of cash. When cash disappears, the link between central bank money and the commercial economy is broken. This risks instability. It reduces the government’s ability to nudge and shape the economy.
Meanwhile new forms of money are emerging. There’s bitcoin and all the other cryptocurrencies, of course. But there are also stable coins – digital currency which is created by private companies, but which is pegged to official fiat money to make it stable.
So what’s the answer to the problem of cash decline and private competition?
Well, one possibility is to create ‘virtual’ bank notes. In this scenario the central bank issues cash in the form of unique and immutable digital tokens, which can be held in a digital wallet. This is CDBC, And every unit of CBDC is a claim on the central bank, just as banknotes are now.
The momentum behind this idea is growing. Increasingly economists believe that the CBDC concept has many benefits. They include:
- Government control. State-backed digital currency gives governments a tool to stimulate the economy.
- Financial inclusion. Central banks can issue CBDC money to every citizen, via simple phone wallets or even plastic smart cards.
- Sustaining the informal economy. CBDC can replace small cash payments in the .
- Programmability. Central banks can build in rules such as specifying that money can only be used to buy specified products or spent by a certain time.
- Reducing crime. CBDCs keep transaction records, so central banks can use them to tackle tax evasion, money laundering and the employment of illegal immigrants.
- Cross-border payments. CBDCs can simplify and accelerate overseas settlements, which can be slow and involve multiple intermediaries.
ċċċ
What is the current status of CBDC trials?
The CBDC Tracker website lists (as of December 2023) at either launch, pilot, proof of concept or research stage.
Meanwhile, :
- Countries representing 98 percent of global GDP, are exploring a CBDC.
- 19 of the G20 countries are now in the advanced stage of CBDC development. Of those, nine countries are already in pilot.
- 11 countries have fully launched a digital currency.
- China’s pilot, which currently reaches 260 million people, is being tested in over 200 scenarios.
- More than 20 countries took steps towards piloting their CBDCs in 2023.
- There are currently 12 cross-border wholesale CBDC projects.
Notable CBDC projects include:
China: Digital Yuan/e-CNY
The People's Bank of China (PBoC) launched its first trial in April 2020 when it distributed 10 million digital yuan to Shenzhen residents. Today, 26 cities have joined the pilot, with around 5.6 million merchants registered and opened.
US digital dollar
In March 2022, the government announced “the highest urgency on research and development efforts into the potential design and deployment options of a US CBDC”. Six months later it for launch. However, As of December 2023, the US remained undecided about whether to pursue a CBDC.
UK digital pound
The Bank of England's announced its interest in CBDC when it published a discussion paper in July 2021. In February 2023 the Bank of England declared "a digital pound is likely to be needed in the future", with the caveat that it has yet to make a decision.
Europe: the digital euro
In October 2020, the European Central Bank (ECB) published its first report on a . Now, the ECB is preparing to “finalise the scheme, search for possible providers, learn through experimentation and support legislative process.” Roll out could start from November 2025.
India: the e-rupee
The Reserve Bank of India (RBI) with eight partner banks in November 2022. By July 2023, the RBI said it retail CBDC transactions were averaging close to 18,000 a day. It by the end of 2023.