Different jurisdictions have set out different reasons for creating central bank digital currencies (CBDCs). Some countries, particularly those with already-operational CBDCs for retail purposes, aim to promote financial inclusion. But in countries where most citizens have access to financial services, central banks are interested in CBDCs as an aspect of the increasing digitalization of finance.
Supporters see benefits in CBDCs, but those benefits are not the same for every country.
Central banks could also choose to use CBDCs to guarantee in full citizens’ holdings (currently, deposits in commercial banks are only partially guaranteed), but this would trigger major changes in the financial system in terms of the role of commercial banks in intermediation and the role of fiat money. So far, central banks have not opted to go this way.
In the euro area, consumers have multiple payment options and a very efficient retail payments system. The currency enjoys high levels of trust and is not challenged by the emergence of private currencies, such as Bitcoin, or by the risk that cash, a monetary system’s anchor, will disappear. For that reason, some analysts argue that a retail CBDC in the euro area offers little obvious added value, at least for the foreseeable future, while others see longer-term benefits.
There is also an active debate about building a CBDC that banks could use for cross-border wholesale purposes (i.e., with other currencies). Proponents point to two ways wholesale CBDCs could change how cross-border, cross-currency payments are made:
- Cross-border payments are currently slow and inefficient. Pilot projects have shown that wholesale payments with CBDCs can generate time and cost savings.
- Any two central banks that have operational wholesale CBDCs could settle transactions between themselves. This would be very different from the current system, as most settlements today are done via the dollar (and then the euro) infrastructure and use correspondent banks.
Further…The euro area and the United States would have to consider carefully from a geopolitical perspective how wholesale CBDCs might affect their global economic standing. By developing a CBDC for wholesale purposes, the European Union would be able to contribute to developing the global standard. – Dan Hughes
Central bank digital currencies (CBDCs), a digital equivalent of cash, are increasingly gaining traction. At least 114 jurisdictions, representing 95 percent of global GDP, are at some stage of developing a CBDC. In 11 countries, CBDCs are now a reality and operate in parallel to their physical equivalent. But it is not necessarily easy for the consumer to understand the difference between a euro in coin or note form and a digital euro.
A good starting point in identifying the benefits of CBDCs is to understand which problems cannot be solved through the growing range of digital payment options provided by the private sector, and which therefore might call for public provision. This is important in explaining why the taxpayer might be asked to finance the creation of a CBDC.
The Concerns of Central Banks
In countries with high levels of financial exclusion and where there is a lack of modern and reliable digital payment systems, a CBDC can facilitate access to payments for many people. But in countries with ample payment solutions and where financial exclusion is a second-order problem, the justification is different. Some central banks are concerned that as finance becomes increasingly digitalized, two things might happen: first, physical cash, the anchor of any financial system, will be displaced, and second, private currencies will become popular. Both could reduce the role of sovereign money.
Central banks have become interested in the idea of CBDCs for three main reasons:
- 1: Increasing use of digital payments. The increased digitalization of payments reduces the role and use of cash in most economies. Cash is often referred to as the anchor of the financial system, providing the necessary trust to the whole system. The concern is that with decreasing use of cash in everyday transactions, physical cash would disappear, thus eroding trust in the system. A digital equivalent of cash would maintain the anchor while addressing the change in payment preferences.
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The emergence of cryptocurrencies.
- 2: Bitcoin and other cryptocurrencies have provided means of payment that are privately issued and managed. Some central banks note that if private money were to become widely used, especially if it is in principle available to everyone globally, it could displace publicly issued money (cash) and fiat money that is issued by financial institutions but monitored and guaranteed in part by public authorities. In their view, this would reduce the money base that central banks control, and therefore their ability to control inflation and monitor financial stability. With CBDCs, central banks would provide a digital equivalent of public money that would mimic some technological features of cryptocurrencies. Supporters of cryptocurrencies, for their part, emphasize the benefits of open, privately run payment networks.
Acceptance
- 3: Improve the reach and efficiency of payment systems. In several countries where many people do not have access to the financial system or digital payments, CBDCs may offer increased financial inclusion. It is not a coincidence that countries already using CBDCs, such as Nigeria and the Bahamas, have cited financial inclusion as a prime motive. Even for countries where financial exclusion is a small and isolated problem, there may be benefits to improving the efficiency of payments. This is particularly true for payments across borders, where proponents say CBDCs could help create a common standard for international payments.
Some central banks are concerned this could affect their ability to maintain monetary and financial stability.
Banking Architecture
Finally, on the retail side, the arguments for a digital euro put forward by the European Central Bank revolve around the speed of digitization of finance and the notion of strategic autonomy. In the ECB’s view, the prospect of finance becoming predominantly and eventually even exclusively digital could challenge the role of sovereign money and of its guardian, the central bank. The ECB also notes that a large share of payments is handled by foreign providers that process information about EU citizens, and argues that a pan-European payment method that is very close to cash would help reduce this dependence. It could also help homogenize payments in the euro area and, given easier access, may help promote the international role of the euro. Critics of a digital euro raise questions about privacy, cost and the impact on commercial banks.
Where Apex POS Fits In
In everyday practice, cryptocurrencies have not displaced sovereign money, and experiences differ around the world. The Apex™ POS System, developed by Alchemy Studios, LLC, is a Front Desk™ web-deployable dashboard for merchants that is being designed to combine accounting software, a point of sale system, and product and inventory management in one place, along with Alchemy Studios’ Point of Conversion Technology at no extra cost. Apex NFT Card Services payment features are pending regulatory approval and are not available yet.
Despite its increasing size, the crypto market still represents a small fraction of the total financial system. According to the ECB, the value of all crypto assets represented less than 1 percent of total global financial assets.