Exploring the benefits and considerations of central bank digital currencies

Central Bank Digital Currencies (CBDCs) and stablecoins have the potential to help digitize entire economies and represent a powerful force in unlocking the Internet of Value. You can learn more about CBDCs and stablecoins and the wide range of transformative benefits through Juniper Research’s recent report Understanding CBDCs & Stablecoins.

In the second part of an ongoing series, we will delve into the world of CBDCs, explaining the benefits and considerations of the exciting proposition. Follow the first blog of the series where we delve into the world of CBDCs, explain what they are, how they work and why they are becoming increasingly important in the global financial landscape.

Today, 130 countries, representing 98% of global GDP, are engaged in CBDC projects. Some, including the United States and South Africa, have entered exploratory phases. Many projects throughout the European Union are in development, while China has reached a pilot phase and is approaching full-scale rollout in mainland areas. The Atlantic Council reports that 19 of the G20 countries are now in advanced project stages.

Elsewhere, including in Nigeria and the Bahamas, solutions have been launched and use cases continue to develop. The Bank for International Settlements now predicts that 20% of the world’s population will have access to a CBDC within the next few years.

Considering the benefits of CBDCs

In a recent Ripple survey of global financial institution leaders, eighty-five percent (85%) of respondents think their country will launch a digital currency within the next four years. The majority of leaders cited financial inclusion as a key CBDC benefit; and many of them feel the technology will deliver improved national competitiveness (44%), ensure greater efficiency within payment systems (43%), and promote innovation more broadly (42%).

According to McKinsey, CBDCs can help central banks address systemic goals, including: ensuring financial inclusion, reducing fraud and money laundering, stimulating payment innovation, and creating a new vehicle for monetary policy, among others.

Globally, jurisdictions value various CBDC functionalities for a variety of reasons. For example, some recognize the opportunity to expand the portion of foreign exchange reserves that consists of sovereign money – or the money issued by a monetary authority versus private bank money that banks owe to their customers and borrowers. Many Central Bankers increasingly want to counteract the malfunctioning of some bank money regimes and employ bank money that is not threatened by crises.

CBDCs are needed to support the most significant positive impact of asset tokenization, an increasingly targeted mechanism for transforming tangible assets (eg real estate and intellectual property) into digital tokens stored on the blockchain. With tokenization, anyone can see the process of asset transfer through ownership.

Efficient settlement of asset exchange is not as impactful if the cash component of the transaction is not as efficient and can be connected in a single atomic update. Wholesale CBDCs, for example, are designed to settle large-scale, high-value securities transactions and interbank transfers, providing operational efficiencies around faster settlement times and greater liquidity when settling other assets such as subscribed real estate.

In addition, tokenization improves privacy and agility, as assets move peer-to-peer without the need for centralized intermediaries within decentralized networks. Governments are increasingly recognizing the implications of tokenization to improve conventional asset ownership and investment models. Tokenization also provides more flexibility and options under appropriate governance (ie central banks in the case of CBDCs). This enables a new balance between data sharing and privacy needs, providing increased transparency and certainty not possible with traditional technologies.

From transferring, paying and settling an asset, to tracking and updating a lien on an asset for credit availability (e.g. tokenized real estate), CBDCs help enable a wide range of use cases for tokenized assets, further as just exchange of value. With the underlying blockchain technology, the holy grail of instant transfer and settlement via a distributed ledger across any signed asset is enabled.

A new financial frontier

Despite expected benefits, CBDC deployment is a new frontier and potential challenges must be considered. Although these may vary depending on design models, implementation challenges may include:

Increased centralization of payment processing and sensitive user data (it is possible that a central bank will store user activity and transactions)

Reduced regulatory oversight of financial systems

Increased difficulty reversing fraudulent or erroneous transactions

Challenges in managing payment receipts and key custody

Susceptibility to erroneous or malicious transactions enabled by complex, automated financial applications

Increased reliance on third parties (eg non-banks)

Download the full white paper for a comprehensive understanding of what Central Bank digital currencies are. Learn about the promise CBDCs hold for developing markets, including large sub-sections of Africa, Latin America and Southeast Asia where infrastructure is lacking and access to physical financial services is limited.