Central Bank Digital Currency (CBDCs)
It is sometimes common to hear that central banks are launching a public cryptocurrency. This refers to the concept of Central Bank Digital Currencies (CBDCs) which, however, as we will see, are not related in any way to the crypto assets we have been analysing in this material.
Central Bank Digital Currencies are digital currencies issued by a central bank. They are similar to the cash issued by these banks (such as euro banknotes and coins), but, unlike traditional cash, they are designed to be used in digital environments and can be transferred and stored on electronic devices.
CBDCs would represent a significant innovation in our monetary system because they would be a new way of representing money (e.g., the euro): it would be a public currency, issued by the central bank, but which can be used digitally.
Central banks are seeking to issue their own digital currencies with the aim of strengthening the role of public money (currently, only banknotes and coins) in an increasingly digitised economy. These digital currencies can also help increase the strategic autonomy of countries that depend on third parties to manage their payments, thereby contributing to the resilience of these systems. Furthermore, these currencies can help increase competition in the payment system, without neglecting financial inclusion, with specific safeguards due to their nature as public money.
On the other hand, CBDCs are also emerging in response to the emergence of stablecoins, which have a greater capacity to act as money and, if used widely, could jeopardise financial stability. Thus, CBDCs can discourage the use of these stablecoins as a means of payment.
Some of the characteristics CBDC may have are:
They can be exchanged with each other and are backed by the public institutions that issue them (like banknotes and coins).
They can be stored and transferred on electronic devices, making them accessible and easy to use.
They could use Distributed Ledger Technology and cryptography, giving them an extra layer of security and privacy in transactions. However, the concept of CBDC is independent of the type of technological solution that each central bank decides to use (not necessarily blockchain, hence CDBCs should not be confused with crypto assets).
They can reduce the costs associated with financial transactions, as they eliminate the need for intermediaries and increase competition in payment systems
In the case of the European Union, work is underway on new regulations to develop a digital euro that would complement cash. This digital euro:
would operate in parallel with cash and respond to growing consumer demand for fast, cheap, and secure digital payments.
would be free of charge for individuals using it for ordinary payments and could be used anywhere in the euro area without any friction.
In addition, the possibility of making this digital euro available offline is being explored, so that payments can be made without the need for a mobile phone or an Internet or power connection, as a way of increasing resilience and financial inclusion. This mode would have enhanced privacy.
The technology behind it is unclear, but it would probably not be Distributed Ledger Technology; instead, attempts would be made to reuse the existing infrastructure as much as possible.