This month The Fintech Times is exploring paytech, meaning any technological innovation that changes the way we pay. We now continue our look at CBDCs.
The concept of central bank digital currencies (CBDCs) has been received with a fair amount of scepticism from people across the globe. Concerns about state-imposed controls and limits, as well as a lack of obvious use cases for CBDCs have meant that they have not found themselves at the top of the wishlist for most.
Despite this, central banks worldwide have begun exploring the potential of implementing digital currencies. There appears to have been a so-called ‘race to arms’ as many of the world’s biggest economies began testing phases this year.
With this in mind, and with the likes of China, the UK and the US taking CBDCs seriously, are CBDCs inevitable? To find out, we reached out to some experts.
‘CBDCs may indeed be inevitable’
Claire Conby, a representative of the Digital Pound Foundation, kicks us off, by explaining why so many central banks are considering the potential of CBDCs: “There is no doubt that private sector initiatives, such as the rise of cryptocurrencies like Bitcoin and stablecoins have pushed central banks to explore digital currencies seriously.
“The driving force behind these explorations has been fears of financial instability and threats to monetary policy – both key objectives of central banks. With it becoming increasingly obvious that the general public is not only increasing in its appetite for digital forms of money but, and perhaps most importantly, money issued by the private sector, it is no surprise that the central banks are putting a significant amount of time and effort into examining the feasibility and practicalities of issuing public digital money.
“Inevitability will depend on a number of different factors and the sentiment of the central bank. Will the central bank issue a CBDC irrespective of anticipated uptake? How important is demand versus simply ensuring that the general public have a choice and that, if they so desire, there is a public-backed form of digital money available to them? Or do there need to be sufficiently compelling use cases, demonstrating value over and above what is available today, in order for the central banks to move forward?
“In certain nations, geopolitical advantages could be a significant motivator. This includes a desire to not be left behind, coupled with the perception that CBDCs can enhance competition and efficiency. These countries view CBDCs as a way to maintain their global political and economic power and influence. In short, public demand aside, CBDCs may indeed be inevitable.”
CBDC ‘development and integration seem increasingly probable’
Uldis Teraudkalns, CEO of Lithuania-based fintech Nexpay, believes that CBDCs are indeed inevitable: “CBDCs are inevitable due to the rise of digital currencies, particularly in the backdrop of an ever-evolving crypto industry.
“As the crypto sector expands, governments, especially in democratic societies, face the challenge of managing its implications. Outright prohibition of digital currencies isn’t feasible or desirable in many democratic settings. Instead, to retain monetary control and ensure the stability and integrity of their financial systems, central banks may see CBDCs as the most viable answer.
“True independence from central banks is a lofty aspiration that digital currencies have long aimed for. However, the notion of complete independence from government oversight and control remains a complex issue.
“One of the primary functions of a government is to manage and stabilise its economy, which is inextricably linked to its fiscal and monetary policies. If a currency operates entirely outside governmental purview, it would jeopardise the government’s ability to enact effective fiscal strategies, thereby potentially destabilising the economy.
“Furthermore, while it might seem that the hype around crypto waxes and wanes, this doesn’t necessarily reflect a slowdown in its adoption. Recent statistics indicate a steady growth in the number of crypto users and transactions, underscoring a burgeoning global interest in digital assets.
“While CBDCs might not replace traditional currencies, their development and integration seem increasingly probable. They could act as a bridge, harmonising the traditional fiscal mechanisms of governments with the dynamic world of digital currencies, ensuring stability, control, and continued relevance in a digital age.”
‘Digital money in one form or another is likely to be the future’
Jeremy Boot, product strategist for digital assets and currencies at Temenos, explains: “The decision to launch or not a CBDC is of course a policy decision for each country to take. That said, digital money in one form or another is likely to be the future. In an increasingly digital world, it feels reasonable to assert that a few decades from now physical cash will mostly have disappeared.
“The question then is will this take 5 years, 10 years, or longer? Some countries such as the Nordics are already largely cashless. In other countries, governments are keen to publicly display support for cash options because it’s a political issue – they don’t want to alienate large numbers of voters, typically the older generations, who are the segment that tends to favour cash. But this is likely to be a generational transition.
“If we take the view that cash will one day die out, or at least become inconsequential, obviously preparation needs to take place to replace it. The question then is should the central bank provide a digital equivalent, i.e. the CBDC, or leave money only in the hands of the private sector? It certainly seems reasonable that CBDCs in one form or another are inevitable. Either as a direct retail token, or in wholesale form that could back money issued by the private sector, in forms such as deposits, regulated stablecoins, or fintech wallets.
“As momentum builds and countries launch their own CBDC, others are likely to follow if only to avoid being left locked out of a new global monetary system that is interconnected through these new ledgers.”
‘Digital currencies are the next phase of the digital revolution’
Julia Demidova, head of CBDC and product strategy at FIS, adds: “Digital currencies are the next phase of the digital revolution and are emerging as a response to changing consumer needs.
“Central banks have realised that there are several benefits of CBDCs, including the potential to increase efficiency, promote financial inclusion, and foster competition. CBDCs can drive the digitisation of economies, encouraging innovation in financial services and payments, which opens the door to a host of new opportunities.
“There is a long road ahead. Stakeholders across the industry will need to integrate CBDC into their infrastructure and merchants will need to add CBDC as an alternative payment option to their point-of-sale terminals. CBDC needs to be integrated with the existing core banking systems, treasury management systems, RTGS, A2A payment systems and other payment systems.
“Given the complex nature of the payment infrastructure, it’s likely that the launch of a CBDC will require time and, most importantly, it will require careful planning. The solution needs to sit alongside existing payment systems – it should not be a ‘rip and replace’ of existing systems.”
‘Strong momentum behind CBDCs’
Chris Cowan, principal consultant at Delta Capita, discusses his view on whether CBDCs are inevitable globally: “Inevitable? No. However, there is strong momentum behind CBDCs which suggests experimentation and adoption in various forms will continue globally.
“There are several factors behind this – the rise of digital payments, the growing prominence of blockchain technology, and concerns over maintaining the control and pre-eminence of sovereign currencies in the face of private cryptocurrencies are contributing to the desire of central banks to explore further. Beyond this, many nations see the benefits of CBDCs as a potential path to achieving strategic goals, such as enhanced monetary policy tools, increased financial inclusion, and more efficient payment systems.
“We can be sure that central banks will continue to explore the possibilities of this technology but universal adoption is not a given. Where implemented, CBDCs are likely to take different forms to suit the individual policies and goals of the adopting country. Additionally, there are numerous challenges to be overcome with CBDCs, such as technological infrastructure, regulatory frameworks, and ensuring public trust and privacy which could delay or change the path of adoption.
“Given the significant amount of interest, experimentation and investment in this area we can be confident that CBDCs will be a component in our future financial landscape. However, the form they will take, when they will be implemented and the extent of their use is far from clear currently and will be driven by complex economic, social, political and technological factors that will vary across geographies.”
