Central Bank Digital Currency (CBDC)

This website is dedicated to this new form of digital money. On this page you’ll find all the information you need.

What is Central Bank Digital Currency?

Basically it’s a form of new digital money, which will be replacing the euro. Based on the benefits that Blockchain brings us, the European Central Bank is currently investigating how and when we’ll be able to implement this new currency for all of it’s European citizens.

A central bank digital currency could ensure that citizens remain able to use central bank money even if cash is eventually no longer used. The ECB is therefore currently studying the potential for developing a European central bank digital currency. No decision on this topic has yet been made, however.

Why is Central Bank Digital Currency so important?

It will mean we will lose our euro/dollar and a new form of money will appear.

This has lots of consequences for almost everyone on this planet.

The way the world makes payments has changed dramatically over the past decade. In Africa, payments are made by mobile phone and SMS. In Asia, governments want less cash to be paid, India is tackling this by invalidating notes below a certain amount. South Korea is removing coins from payments and other Asian countries are leaving this to the fintech industry.

In the US and Europe, almost everyone pays with online transactions and with their payment card. In South America, bitcoin is used to transfer money, and in Argentina and Venezuela, bitcoin is also used as a store of value as an alternative to the hyperinflation of their fiat currency.

Central banks cannot lag behind and must innovate in order to meet the real economy and to be able to steer towards monetary policy.

If a private party such as Facebook or a decentralized alternative such as bitcoin takes over a large part of the payment system, the central bank will lose the ability to implement this policy.

Against this background, central banks are trying to understand the financial and economic implications of CBDCs. And at the same time, it is also up to central banks to keep commercial banks happy.

And should all these bitcoin-inspired initiatives fail to get off the ground, there is always bitcoin there. It is quietly building on the safest network in the world, block by block.

What is the Central Bank Digital Currency?

CBDC stands for Central Bank Digital Currency. In other words, digital money from the central bank. Some central banks are already developing their own coin, while other central banks are at least already talking about it.
In this article we explain what a CBDC is and why these coins can play an important role in the future. Mind you, there is a lot of talk about and written about it, but there is no official definition of what exactly a CBDC is yet. We therefore assume the most common explanation.

What is the role of the Central Bank?

Central banks such as the ECB in Europe and the Fed in the US play a guiding role in our economy, they are responsible for monetary policy. While opinions are divided on the extent to which central banks should influence the market, policy control becomes increasingly difficult as financial markets become more complex.
The demand for credit and daring to take financial risks (whether or not morally reprehensible) have meant that regular, commercial banks have become too big to fail. In English this is called Too big to fail.
Many central banks are also concerned about the recent unpredictability of US trade policy, particularly as the dollar is used to pay half of all global bills. Another factor is that two-thirds of all shares are priced against the dollar. In addition, the emergence of shadow banks (we will return to this later) and the development of financial technology (FinTech) ensure that central banks cannot rely blindly on existing policy instruments.
This has meant that traditional central banks have to explore new perspectives, namely that of technology.
Bitcoin is an independent means of getting out of control of both central and commercial banks. Not surprising that banks are looking at a slightly different solution, which comes from the same angle as bitcoin. The banks are looking at what blockchain can offer to create their own digital currency. And there is increasing interest in this.

But what exactly is a CBDC?

We wrote earlier that there is no fixed definition of a CBDC. There are some common denominators between the different views and Wikipedia summarizes that well:
Just like paper banknotes, CBDC is a means of payment, a unit of account and a store of value. And just like paper money, each unit is uniquely identifiable to prevent counterfeiting. CBDC is part of the total bulk money, along with other forms of money such as cash and scriptural money. It can be stored, transferred and transmitted by a variety of digital payment systems and services. Whatever service you use, the validity of the CBDC is guaranteed.
There is no requirement for a CBDC to run on a blockchain. Many central banks are talking about this and blockchain provides the technological architecture to keep track of the transactions of all companies and citizens.

How is a CBDC implemented by central banks?

That is not entirely clear yet. Most central banks are still in the conceptual phase of the development cycle. You can, however, roughly distinguish three options.
A proposed solution is for the central bank to offer deposit accounts directly to the people and possibly issue a digital token. This token is comparable to existing cryptos and can also be stored in wallets. The central bank takes over the role of commercial bank and the public is allowed to transact with central banks and hold the CBDCs themselves.
But not every central bank is willing and able to take on the role of commercial banks just like that. These central banks choose to provide reserve accounts to all financial institutions. These institutions can thus submit a claim and transactions can be carried out using CBDCs. In return, financial institutions bear responsibility for KYC and data management. This is not a new idea. China requires Chinese payment providers such as WeChat to keep their customers’ money at the central bank. This could also apply to stable coins in the future.
A third proposed option is that commercial bank assets should be fully backed by central bank reserves. This is a radical scenario where fractional banking actually no longer exists. CBDCs can improve financial inclusion and reduce systemic risk. Introducing these coins can sideline commercial banks unless they adapt and, for example, mainly offer them credit in the form of CBDCs.
An extra option is that it will be a combination of these three options. Whatever one chooses, this has a major impact on the economy and the financial world. Banking as we know it today is undergoing a complete overhaul. Commercial banks are getting much smaller and are no longer too big to fail.

What are the pros and cons of a CBDC?

The pros and cons of a CBDC read as a combination of bitcoin and current fiat money. We list a few:
Technology: Rather than relying on third parties such as banks and clearing houses, money transfers and payments can be made in real time, direct from the payer to the receiver. Just like with bitcoin.
Financial inclusion: Central bank accounts can be a powerful tool for financial inclusion, especially in countries where it’s not obvious that you can just open a bank account with a commercial bank.
Tracking: Depending on your perspective, this can be an advantage and a disadvantage. If a CBDC is issued via a blockchain, a government body can better keep track of the payment flows. That means you are compromising on privacy, something that cash and cryptos such as bitcoin do offer. On the other hand, this makes it easier to collect taxes and governments can better keep track of the money flows to and from criminal organizations, for example. It will also become more difficult to launder money.
Shadow Banking: This word may sound very negative but it is not necessarily. This also refers to the micro-loan industry, something that governments have little control over.
New monetary policy: If central banks now want to pump money into the economy, they will do so by buying up bonds (quantative easing) and lower interest rates. First of all, this money ends up with the very rich. They profit much more from new money than citizens with an average income, for example. This is called the cantillon effect. With CBDC and an account directly at the central bank, there is a new channel to get money directly into the economy.
Financial security: There is less need for fractional banking and your bank can hardly fail. This makes the deposit guarantee scheme virtually redundant.

How far is the development of CBDCs?

In March 2019, the UK Institute and Faculty of Actuaries published a comprehensive report on CBDCs. Although the overview below may be a bit older at the time you read this, it does offer enough insights.
Not implementing CBDC for now: Azerbaijan, Australia, Denmark, ECB, Estonia, Germany, Hong Kong, India, Israel, Japan, New Zealand, Norway, South Korea, Switzerland and the US.
Do study the long-term potential of CBDCs: Brazil, Canada, China, Indonesia, Israel, Norway, Singapore, Saudi Arabia, United Kingdom, United States, ECB and Japan.
Already experimenting: Bahamas, Eastern Caribbean States, Kazakhstan, Philippines, Russia, South Africa, Sweden, Thailand, Ukraine, Saudi Arabia and Uruguay.
CBDC operational: Iran, Marshall Islands, Senegal, Tunisia, Venezuela
CBDC stopped: Ecuador
Tunisia is in doubt, there are reports that they have already launched a CBDC but the African country’s central bank denies this. And China says they can provide a CBDC in the short term. If so, the rest of the world will follow very soon.