Central bank digital currencies (CBDC) are digital currencies issued by central banks. They are similar to cryptocurrency in the sense that they are digital, but they are distinct because of their governance by centralized government entities. CBDCs are also known as “govcoins.”

The idea for CBDCs pre-dates cryptocurrencies. As early as 1996, the Bank of International Settlements (BIS) published a paper entitled, “Implications for central banks of the development of electronic money.” The BIS also published the “Survey of electronic money developments” in 2001. Cryptocurrency has revived discussions about the issuance of digital cash and “emoney” by central banks.

Money supplied by central banks play a unique role in the payments system. Historically central banks have delivered money to banks in the form of reserves and to the economy at large in the form of currency. CBDCs are an interesting development in the digitization of money. As central banks in countries like China explore this option, there will be greater pressure to adapt and evolve.

What are the pros and cons of CBDC? The tradeoffs are closely related to the distinction between sovereign currency and cryptocurrency. Although both CBDCs and cryptocurrency are digital, the way in which they function is quite different. This suggests that the two forms of money could co-exist side by side.

In 2003, the Bank of International Settlements (BIS) published a report entitled “The role of central bank money in payment systems.” The report was written by the Committee on Payment and Settlement Systems, the predecessor of CPMI. This report helps clarify the unique features of “central bank money” in the global economy. One of the major issues with CBDCs is direct access to central bank money without going through a bank. In this way, the central bank is competing with commercial banks for customers. The 2003 report states that the Deutsche Bundesbank (central bank of Germany) opened accounts for enterprises and private customers but discontinued due to “competition” reasons. Central banks are mostly quasi-public entities and do not want to be viewed as competing with private firms.

The Riksbank, which is the central bank of Sweden, has been exploring the idea of an eKrona for many years. Sweden is about 95% cashless as a society, so government officials have recognized the need to transition to a digital currency. Currently, electronic payments are processed through a handful of banks, so the potential for a monopolistic payments system is part of what motivated this alternative. The eKrona has now launched and you can learn more at https://ekrona.com.

The most recent example of a pilot program in this area is the CBDC issued by the People’s Bank of China (PBoC). China has already offered their CBDC to Chinese citizens in certain domestic markets as a way to test its viability. This example demonstrates that CBDCs are not just a theoretical consideration for the future. As more and more central banks explore this idea, there is potential for a radical transformation in the way that central banks create and distribute money.

Resources

Central Bank Digital Currencies: 4 Questions and Answers – IMF Blog