More than 60 central banks are exploring the possibility of launching central bank digital currencies (CBDCs).
Among them, the U.S. Federal Reserve Board published a discussion paper on the topic 10 days ago and is inviting public comment on how a CBDC — a digital dollar — might improve the safety and effectiveness of domestic payments.
As the Fed noted in its invitation for comments, a CBDC could provide a safe, digital payment option for households and businesses as the payments system continues to evolve, and may result in faster payment options between countries. But there may also be downsides, including how to ensure a CBDC would preserve monetary and financial stability as well as complement existing means of payment. Other key policy considerations include how to preserve the privacy of citizens and maintain the ability to combat illicit finance. The Fed’s paper discusses these and other factors in more detail.
Torsten Hoffmann, chief technology innovation officer for SAP Banking and an expert on CBDCs, cryptocurrencies and other banking issues, notes that CBDCs are quickly gaining traction across the traditional finance landscape.
Currently, he says, China is actively working on its plan to connect its central bank digital currency to Hong Kong’s Fast Payment system, and Israel is accelerating its study and preparations for the possibility of a digital shekel.
Indeed Hoffmann believes that the adoption of CBDCs by central banks “has the potential to completely alter the banking landscape,” and that it could result in profound changes not only to the commercial banking system, but also to tax and benefits systems.
If the central bank becomes of a full-service bank, he says it could be the first step to a central bank digital wallet. Then central banks could provide money directly to people during a crisis — like COVID-19 — and impose limits on what the funds could be used for and dictate how long the funds would be available.
Similarly, CBDCs could enable central banks to enter the lending business help implement government policy. For example, central banks could help implement a sustainability agenda by only lending to environmentally friendly businesses.
Hoffmann says the full impact of the introduction of CBDCs will depend on the details. But in the meantime, he notes, bankers appear convinced CBDCs are coming. A recent study from banking security specialist OneSpan found that 84% of banking leaders plan to take steps to prepare for CBDCs over the coming year.