Future of Finance: CBDC
Central Bank Digital Currencies. 80% of all central banks is researching CBDC, but what is it? This is a digital currency that is directly distributed and backed by the central bank and only exists in digital form. CBDC are an addition to or replacement of cash. For years relative cash transactions have decreased in the Netherlands. In 2010 cash transactions were 70% of total payments, but now it is just under 20% of total payments. However absolute demand for cash has increased(1).
A CBDC is directly distributed by the central bank and makes third parties unnecessary for payment transactions. Commercial bank money is not the same as CBDC because commercial banks can go bankrupt which means you would lose your savings ‘investment’. This would be different with a central bank, which is fully backed by the government and cannot go bankrupt.
The aim of a CBDC is to make transactions faster, cheaper and more inclusive. Furthermore, a CBDC would improve monetary policy due to eliminating the restrictions of cash. The central bank could implement a negative interest rate in order to stimulate consumption, without having to fear a bank run for cash. The CBDC would also open up the world of finance to people who can not have access to a commercial bank account(2) .
However, without cash there is no emergency way of payment in case of an electric power failure. Cash always works. Without cash anonymous payments will be impossible, due to the digital nature of the currency requiring administration, which is not needed in cash transactions. Which could discourage anonymous donations to charities. Also, by centralizing monetary policy and the payment system the consequences of mismanagement could have a large impact to the economy.
China is frontrunner in researching and implementing CBDC. The digital yuan is fully backed by yuan reserves. China has researched CBDC for 5 years and have started implementing. In September they started a test where they gave 50.000 participants in Hong Kong 200 digital yuan (€25). Similar to a lottery (3).
- Rabobank: Digitaal centralebankgeld als alternatief voor contant geld
- IMF: Central Bank Digital Currencies: 4 Questions and Answers
- Investopedia: Understanding China's Digital Yuan