At A Glance – Central Bank Digital Currency

Despite uncertainty about the viability of blockchain, banks are interested

At least 44 global banks are currently considering the merits of Central Bank Digital Currencies (CBDC). By offering a digital version of a country’s fiat currency, central banks hope to increase participation in the banking sector and address some of the issues associated with traditional finance such as transaction delays and costs.

CBDC can be split into two main categories: wholesale and retail. Wholesale is available to commercial banks and clearing houses, and aims to make interbank payments more efficient and less prone to counterparty risks. Retail can be accessed by members of the public with a view to increasing financial inclusion and offer an alternative to cash.

Although CBDC sounds well suited to countries in which cash use is already dwindling, there are considerable benefits for emerging economies too. In regions where financial processes are less established, CBDC could help to solve inefficiency, encourage more people to engage with banks, and improve overall economic welfare. The Bank of Thailand, the South African Reserve Bank, the Eastern Caribbean Central Bank and the National Bank of Cambodia all plan to use CBDC to transform the performance of their monetary systems. A lack of ingrained financial infrastructures could enable these banks to adopt digitised solutions faster than financial institutions in areas that are supposedly more economically developed.

Experimentation doesn’t equate to adoption, but the number of banks that have shown an interest in CBDC is worth noting. Central banks play a major role in the direction of global economies, and their decisions will impact financial markets. If they are willing to invest in CBDC research, it’s likely that digitised national currencies will play an important role in the future financial sector.

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