What are the potential benefits of Central Bank Digital Currencies (CBDCs)?

• CBDCs aim to reduce costs in the financial sector while striving to increase transaction speed.

• They aim to provide access to financial services for those without bank accounts.

• CBDCs aim to enhance payment security while striving to reduce chances of fraud.

Central Bank Digital Currencies (CBDCs) are the digital form of a country's fiat currency, issued and regulated by the central bank. Unlike cryptocurrencies, which are decentralized, CBDCs are state-issued and operated. They are not pegged to a physical commodity, but their value is equivalent to the country's fiat currency. Central banks that aim to issue CBDCs are the US Federal Reserve System, the Bank of Japan, the People’s Bank of China (PBOC), and Germany’s Deutsche Bundesbank.

There is no one-size-fits-all model for CBDCs; different countries are piloting a variety of approaches. For instance, DCash, implemented in the Eastern Caribbean, is an account-based model where consumers hold deposit accounts directly with the central bank. On the other hand, China's e-CNY relies on private-sector banks to distribute and maintain digital-currency accounts for their customers. Currently, 87 countries, representing a significant portion of global GDP, are exploring CBDCs.

Several trends have likely spurred central banks' interest in CBDCs. The decline in cash usage, growing interest in privately issued digital assets, decreasing sense of central banks as payments innovators, and rising global payment systems are some of the key factors. Central banks view CBDCs as a potential stabilizing anchor of local digital payment systems, with the intention to lead strategic conversations on cash use cases in a public forum.

CBDCs aim to address issues related to efficiency, security, and access in the financial sector. They aim to reduce costs by shifting resources away from physical infrastructure towards digital finance. They also strive to improve the speed and efficiency of electronic payment systems. For those without bank accounts, CBDCs accessible through mobile devices aim to enhance financial inclusion. Lastly, CBDCs aim to enhance payment security by ensuring that a transaction is finalized and unalterable, with the intention to reduce the chances of fraud.

While CBDCs present potential benefits, they come with challenges. When assets become digital, they become traceable, potentially leading to taxation, which could pose a hurdle to voluntary adoption. Technological stability is another concern. As central banks continue to explore the potential of CBDCs, these and other challenges will need to be addressed for the implementation and adoption of this new form of currency.