Central Bank Digital Currencies will redefine money. We may be surprised by the implications.
Adoption to Date#
Central banks are actively looking at, or already developing Central Bank Digital Currency (CDBC). At last count, 11 nations already have CBDCs with over 20 piloting it in some way.
In the Philippines, the Bangko Sentral ng Pilipinas is currently conducting Project Agila to pilot a wholesale CBDC.
The Implications#
Along with stablecoins, the killer use case for CBDC is settlement. While compelling, we need to understand that digitally native currency will change the very nature of money as we know it.
By championing digital payments, central banks are effectively digitizing bank notes via electronic money and/or central bank sanctioned stablecoins. Wholesale CBDC stands to digitize the ledger of bank reserves held by a central bank. Together, base money becomes entirely digital and programmable.
The Impact?#
Better Control Over Use of Money#
It will become easy to track who is using each unit of currency and enforce how it is used. CBDCs (and digital currency that settles to it), for example, can mitigate money laundering and fraud directly at the currency level. This is a huge win for banks that struggle to comply with sub-optimal, if not outright ineffective, AML implementations.
Flexible Monetary Policy#
CDBCs allow a finer level of monetary policy. Why do we have one interest rate for an entire country? Rates could be set and enforced for any sub segment of an economy. By controlling the costs of capital at a granular level, regulators can expand specific industries by targeting monetary policy via CDBCs (and digital currencies which rely on them). For example, incentivizing chip manufacturing while de-priotizing internal combustion automobile production. Money could be programmed to literally expire to encourage spending.
Expand Boundaries of Monetary Policy#
CBDCs could make negative interest rates actually work when the central bank wants to stimulate the economy. Today, physical cash effectively puts a lower limit on how negative you can go because holding it is essentially a zero interest rate option on currency.
Simplifying Cross Border Transactions#
Yes, this is the killer use case, but it too has implications. CDBCs will allow central banks and cross border commerce to bypass the US banking system. This is actively happening with the Bank of International Settlement’s (BIS) mBridge project with participation from five central banks leading up to an MVP in the near term.
Central Bank Agenda#
Central banks have every reason to digitize currency (and eliminate cash). I think that’s why we are seeing the rapid global uptick in adoption.
What do you think? Do we fully understand the implications of CBDCs? Are there others to consider?