Digitalization is an inevitable part of 21st century. But is the world ready for the era of Central Bank Digital Currency (CBDC)?

Introduction

Central banks are exploring new possibilities through innovative technologies. Over the last few years, central banks have been seeking for potential implementation of digital currencies as well as a distributed ledger. These efforts include but are not limited to:

Project Jasper by Bank of Canada

Project Khokha by South African Reserve Bank

Project Stella by the European Central Bank and the Bank of Japan

e-Peso by the Central Bank of Uruguay

Key objectives from these projects were to look for ways to optimize the financial system through digitalization. Since 2017, a number of financial authorities saw CBDC as a new form of money. By the end of 2018, the majority of central banks worldwide were involved in CBDC research in 2018.

Central Bank Digital Currency (CBDC)

CBDC is a new form of digital money issued by the central bank (100% controlled by the government). It serves as a method of payment, a medium of exchange and a store of value. Central banks may seek its potential implementation for the stability of the financial system, payment systems, monetary policy transmission, etc.

Types of CBDC are distinguished by the following:

Accessibility — Widely (available everywhere) or Restricted (Limited to certain agents or jurisdiction)

Technology — Account-based (like balances in reserve accounts) or Token-based (like cash)

Three Variants of CBDC

1. General Purpose, Account-based:

An account is held at the central bank for the public. Instead of sending and receiving tokens, the transfer claim would be made to the central bank. Once the claim is verified through a central ledger, the transaction occurs between accounts.

2. General Purpose, Token-based:

The central bank issues a digital token for the general public. It involves the transfer of digital token just like cash. This variant of CBDC could provide immediate and anonymous settlement but could increase financial integrity risks.

3. Wholesale Only, Token-based:

Wholesale-only CBDC is a limited-access digital token (limited to banks and other financial institutions; not open to the general public) issued for wholesale settlements such as an interbank payment and securities settlement. Using the distributed ledger technology, it can potentially increase settlement efficiency.

CBDC Design