During the first wave of the pandemic, over 80 million adults in India made their first digital merchant payment. It’s because most of them were concerned about the hygiene of currency notes since they get exchanged very frequently. Such widespread events have changed their mindset about making payments, and they are slowly shifting toward adopting digital currency payment technology for processing cashless transactions.

Paying close attention to consumer psychology and the evolution of blockchain and cryptocurrency in financial services, central banks from all over the world have adapted to the wave of digital currencies. In this blog, we will go through the global strategies and impact of CBDC on the financial ecosystem and why this currency needs to be issued worldwide!

What is a CBDC?

You are probably wondering, what exactly is a CBDC? Well, CBDC stands for Central Bank Digital Currency and is a digital form of money issued by central banks that has a fixed value. With more people choosing to go cashless, central banks stepped up to meet their demand and created this digital currency. Unlike physical cash, CBDC exists in the form of digital coins and is accepted everywhere. It’s not tied to any physical assets like gold and silver. Instead, you can use it to buy goods and services. A very specific type of digital ledger technology is used in CBDC to preserve the integrity of data records. As of now, 87 countries have already explored the Central Bank digital currency, while 9 of them have launched a state-owned digital currency.

Breaking down the types of CBDC

CBDCs exist in different forms depending on their purpose of usage. These CBDC models were proposed by members of central banks and international agencies. As technologies become more advanced, more versions of CBDCs will likely be introduced. They will add more transparency and efficiency to processing transactions. At present, CBDCs can be classified as follows:

 
1) Retail CBDC

It is issued for the general public, where people can make their regular payments without worrying about its safety. This electronic currency is supported by the country’s central bank and the government. It protects consumer assets by eliminating the role of intermediaries and can be beneficial for the innovation of financial ecosystems.

2) Wholesale CBDC

For large-scale transactions like transferring funds between banks, wholesale CBDC is used by commercial banks and financial institutions. It is not directly available to common people and is designed for making settlements spontaneously. It supports higher-value digital payments between banks and conducts transactions quickly and automatically.

3) Hybrid CBDC

This adaptable CBDC is a combo of both models, as both people and commercial banks can use it for conducting quick transactions. However, the catch is that customers need the support of intermediaries to gain access to their CBDC. Consumers can claim their account on the central bank, and it preserves their financial records and stability.

Innovative CBDC Strategies in Various Regions

Most of the global monetary authorities are taking steps to see how the digital form of currency can be utilized to its true potential. Some of them are not fully convinced to deploy it due to the resistance of the private sector, the degree of digitization of the economy, and regulation policies. Every region has its own set of decision-making factors to create a regulatory framework for issuing its digital currency. Let’s explore the innovative CBDC strategies of the most prominent regions.

1) Europe

The economists at the European Central Bank analyzed the 2022 ECB study on Payment Attitudes of Consumers in the European Union (SPACE) to prepare a model on how to persuade users to adopt the CDBC and fill the gap between adoption and usage. It was observed that after the pandemic, people began using mobile phones mostly for peer-to-peer payments, and this behavior increased from 3% in 2019 to 10% in 2022. Many European countries have capitalized on this opportunity and adopted CBDC in their infrastructure. 

a) European Central Bank (ECB)

ECB has issued the digital euro, an electronic equivalent to cash that would give an extra payment option to users. It will be accessible to all Euro area countries and stored on the user’s bank or with the support of an intermediary. It will build up the monetary sovereignty of all Euro areas and protect them from potential cyberattacks and technical challenges.

b) Switzerland

The Swiss National Bank has expanded its digital currency project with other commercial banks to increase transaction volumes. They have improved their financial stability by terminating credit card risks and reducing liquidity risks. They are looking into how central bank money can be beneficial for settlements when assets shift from centralized markets to tokenized platforms.

c) United Kingdom

The Bank of England (BoE) has decided to use distributed ledger technology (DLT) and blockchain in financial services for their CBDC strategies, to promptly deal with risks associated with the payment industry. It is going to collaborate with the Treasury, the Payments Systems Regulator, and the Financial Conduct Authority to make sure that all types of currency can be traded with each other.

2) Asia-Pacific

The Asia-Pacific region has seen some of the most noteworthy leaps in CBDC adoption. Countries in this region have been exploring CBDC for its usage and applications in the retail and wholesale sectors. According to the Bank for International Settlements (BIS), 93% of central banks have initiated the development of CBDC in their infrastructure, and this digital currency is set to promote financial inclusion and modernize payment technology for the greater good of its population.

a) India

The Reserve Bank of India has acknowledged CBDC strategies as the future of finance and has integrated CBDC into the financial ecosystem. It is creating a regulatory framework for tackling money laundering and terrorism financing and considering including a scalable and long-lasting technology stack in its existing infrastructure.

b) China

The digital yuan, also known as e-CNY, hasn't been very successful since the market is mostly dominated by Alipay and WeChat Pay. The Chinese government has put strict limitations on the power and market share of commercial banks and digital payment corporations. Still, the e-CNY struggles to deal with many technical challenges, like liability for claims.

c) South Korea

The Bank for International Settlements (BIS) is collaborating with the Bank of Korea to innovate banking technology through the implementation of the pilot project. The Bank of Korea is given the independence to create its policy. They are taking steps to solve the challenges of monetary and financial stability along with the integration of technology into the financial systems.

3) Middle-east and Africa

Secure and quick cross-border payments are a priority for most oil exporters in the Gulf region since data is available in various formats and every nation operates on its own regulations. To support financial inclusion and enhance the quality of cross-border payments, 19 countries in this region are already exploring CBDC as a digital payment option. Some of these countries are still in the pilot stages of research and haven’t progressed to an advanced POC stage. While a few countries in this region have successfully adopted CBDC as a form of digital payment. 

a) Saudi Arabia

Noticing the shift to digital currencies, Saudi Arabia decided to become part of the multi-country initiative for Central Bank Digital Currency and initiate cross-border digital payments. It has joined hands with China and the UAE in the “mBridge project” that is currently in its initial stages. The goal is to reduce the expense of payments and fast-track the settlement process.

b)  Qatar

The Qatar Central Bank has developed its CBDC infrastructure with artificial intelligence and distributed ledger technology. They have tested it for high-value payments and settlement of transactions, with the assistance of a group of local and international banks. This project touches on the uses of CBDC as digital coins to provide access to capital markets for setting up banks in the country.

c) South Africa

The South African Reserve Bank (SARB) is going to use stablecoins to aim for financial inclusion, interoperability, reducing costs, and encouraging innovations. In the coming years, it is going to explore the feasibility of digitizing the cash and follow the sandbox approach to evaluate payment use cases and other prospects of using digital payments.

4) America

Due to the legislative resistance, the adoption of CBDC in America is at a halt. The CBDC Anti-Surveillance State Act prohibits the formulation of CBDC as there are several privacy issues and data security risks associated with it. Some of the American states, like Nebraska and Florida, don’t even recognize CBDC as legal tender and have passed laws to prohibit this form of digital currency. Financial control and surveillance are some of the major reasons behind the formulation of this law.

a) USA

The CBDC of the USA hasn't been issued yet due to safety and liquidity risks. The Federal Reserve has concerns that the funds must be easily transferable irrespective of the intermediaries used, and the identity verification technology must be robust. Its CBDC will behave like a legal tender and act like a tokenized and blockchain-based form of the US dollar.

b) Canada

The Bank of Canada adopted CBDC after observing the reduction in cash transactions. They partnered with the Creative Destruction Lab and formed the Blockchain Research Institute. The Canadian CBDC enhanced the financial inclusion of their citizens, who initially didn’t possess credit or debit cards, and encouraged the development of innovative financial technology.

c) Caribbean

Three retail rCBDCs were introduced in the Caribbean to convert the cash-based economy into a digital economy. However, the Sand Dollar network wasn’t adopted widely by merchants and consumers, as the Sand Dollar wasn't unified with the traditional banking system. The people were not financially educated to understand the benefits of cashless transactions.

Challenges associated with CBDC

1) Technical issues: Connecting a broader network

If we think of rural areas that regularly deal with internet connectivity issues and power outages, it creates a challenge for the central banks to include them in the network. Even the integration of existing systems and spending on the infrastructure is another hurdle for CBDC.

2) Financial awareness: Orthodox mindset of people

A lot of people are still stuck in the Stone Age and aren’t ready to accept this form of electronic currency, and that is affecting the speed of digitalization. Central banks might have to make extra efforts by organizing awareness campaigns just to assure them that digital currencies are the future.

3) Disintermediation: Affecting the overall economy

CBDC can shake up the financial stability of any bank’s business if it is not issued and designed properly. Since these banks are a part of some of the segments of the financial ecosystem, it will gradually affect the overall digital economy and cause severe consequences.  

4) Supervision: Protecting Data from cyber threats

Since cryptocurrency has always been on the radar of cybercriminals, the government will have to put extra effort into monitoring, supervising,  and protecting sensitive data from cyberattacks. Strict measures need to be taken as digital currencies are more vulnerable in nature.

Top Reasons Why CBDC Should Be Issued Everywhere

1) Impenetrable security

Central bank digital currency works on transparent blockchain technology. Using blockchain in financial services reduces the amount of fraud and identity theft as it provides a secure and transparent payment architecture backed by impenetrable authentication protocols. It keeps a clear record of every transaction that can contribute to warding off money laundering crimes.  

2) Boosted payment efficiency

Integration of CBDC in the existing infrastructure will enhance the payment speed and reduce settlement time, as there is no involvement of intermediaries. With quick, easy, and secure transactions, the user retention rate will improve proportionally. More customers will be drawn toward adopting cashless payments.

3) Financial inclusion

The majority of the public in remote locations doesn’t have access to financial services and internet facilities, and even the banks aren’t interested in covering these regions. For those people, Central Bank Digital Currency can provide secure and affordable options to manage their money without the requirement of carrying physical cash.  

4) Accessible without internet

Consumers can transfer funds without the need for an internet connection. This is due to the functionalities of programmability in CBDC supported by Bluetooth technology, because of which you can scan the payment code at any grocery store and transfer with limited or no internet connectivity.

Conclusion

The emergence of CDBC has provided a substitute for traditional payment models and has disrupted the financial ecosystem worldwide. It is a dynamic mix of regulatory, economic, and technological components that drastically enhance the quality of cross-border payments with its transparent and robust blockchain technology.

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