Podcast September 19, 2023

Are CBDCs really the future of payments?

In 2022, the US Federal Reserve announced that it had been developing a “wholesale” central bank digital currency (CBDC), designed to speed up transfers between banks around the world. The aim of the new US network would be “to reduce settlement risk in cross-border, cross-currency transactions.”

But there are questions around the introduction of CBDC, with some observers wondering how much value these initiatives will actually bring to end users. They are not the only digital currency being promoted.

For this episode of Payments Innovation, our host Cara Hayward investigated the potential benefit of the CBDC with Clara Medalie, Director of Research at digital assets data provider Kaiko, and Sean Ryan, Vice President and Associate Director at business data and analytics firm FactSet.

A rocky road for rollouts

The global uptick in CBDC development has been accelerated by the digital transformation sparked by the Covid-19 pandemic, as well as by the rise of cryptocurrency, according to economists at The Atlantic Council. Eleven countries — primarily in the Caribbean, as well as Nigeria and China — have already introduced CBDCs. Thirty-two have them under development, while another 45 countries are at the research stage.

This level of interest does not surprise Ryan. “Because CBDCs are issued by the sovereign, they can help advance certain policy objectives in terms of financial inclusion, shaving down transaction frictions and so making things a little cheaper and a little faster,” he noted.

There are some concerns about the impact of CBDCs. In a summary of responses to the Federal Reserve’s initial discussion paper on CBDCs, there were worries that this type of currency could widen the digital divide and exclude low-income and older people without internet or mobile phone access. Others felt that stablecoins — a privately issued digital currency designed to hold constant value against a reference asset — could achieve the same benefits as CBDCs, including improved cross-border payments, without the same perceived risks around privacy and government intrusion.

As Medalie put it: “I don’t think anyone has discovered that use case yet that can’t already be addressed by existing payment solutions. So the big question mark about CBDCs in general is, what problem is it actually solving that cannot already be solved by existing solutions?”

A matter of principles

CBDCs have entered the political arena in the US, with Florida Governor and Republican presidential candidate Ron DeSantis banning their use in Florida.

There are also ongoing concerns about the cybersecurity threat of CBDCs. And yet there remains a view that as other countries introduce CBDCs, the US will need its own in order to ensure cross-border interoperability. US Treasury Secretary Janet Yellen has argued that, even if there are questions around whether CBDCs are the right tool to implement, the US should be in a position where it was able to do so.

That eventuality may not be far off. When the Atlantic Council’s GeoEconomic Center started tracking CBDCs in 2020, 35 central banks were looking into them as a currency. At last count, that number was 114. “Technologies such as CBDCs that allow countries and their commercial banks to settle currency across borders almost instantly are changing the nature of cross-border flows of money,” noted Josh Lipsky, Senior Director at the GeoEconomic Center.

Two years ago, the G7 nations issued a set of principles for the introduction of CBDCs, including the premise that they should be grounded in “transparency, the rule of law and sound economic governance.” Ryan noted that though the principles were vague, “They’re certainly worthy aspirations in terms of protecting privacy and individual liberties.”

Will the reassurance of such principles be enough to transform CBDCs into a familiar digital currency? The answer to that question is a fast-moving “watch this space.”

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Until next time!

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