Insight

Digital Currencies: The (Coming of) Age of Central Bank Digital Currencies

Digital Currencies
Key takeaways
1
CBDCs are not state-backed cryptocurrencies or stablecoins and will not have a "mining" mechanism like them. The launch of CBDCs will likely bring greater regulation of some cryptocurrencies, especially stablecoins.
2
Most central banks are likely to avoid a "direct CBDC" In which the central bank allows consumers and businesses to open accounts directly with the central bank. Instead, Intermediated models are likely to maintain the role of banks. CBDC design choices have Important Implications for existing payments systems and may disrupt existing fintech business models.
3
China is the largest economy that Is pioneering a CBDC and Is likely to launch Its CBDC In the not-distant future. Developed market central banks are in much earlier stages in their projects and are likely to move carefully

Central Bank Digital Currencies (CBDCs) Are No Longer a Fringe Fascination

Many countries are actively exploring or have already launched CBDCs

Once a pipedream of the digitalization of finance, central bank digital currencies (CBDCs) have reached a critical moment. Small states in the Caribbean have pioneered the world’s first official digital currencies, while China has continued to expand its digital yuan’s pilot project to the masses. 38% of central banks are actively researching a CBDC of some kind encompassing 76% of the world’s population. Of those, 46% are currently conducting or have already completed a pilot program. It is our view that CBDCs are not a question of if, but when.

In this piece, we seek to define and explore CBDCs and assess their characteristics and their disruptive potential. We address the potential implications for monetary policy, financial markets, banking, and asset prices. We conclude with an overview of major CBDC projects, including China’s digital yuan and the case for a digital US dollar or euro.

ECCU = Eastern Caribbean Currency Union, comprising Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.

Sources: Auer, R, G Cornelli and J Frost (2020), "Rise of the central bank digital currencies: drivers, approaches and technologies", BIS working paper, No 880, August, latest available data as of 31 January 2022.

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