The Need for Central Bank Digital Currency

In episode 6 of The Cash News, Tom and Shaun are joined by Jamiel Sheikh and John Kiff of the Central Bank Digital Currency Think Tank as they discuss the fervor behind central bank digital currency and its acceleration over the past 18 months, both in the messaging central banks are projecting into the market and the interest in adoption, along with the need to bring central banks together to share experiences and information about digital currencies. 

Central bank digital currency, often abbreviated as CBDC, refers to various proposals from central banks to issue an “official” digital currency. While there is no official definition for CBDC, it is often used to describe the idea of a “new” form of digital currency, backed by a nation-state so it has a more stable value. In the live-stream, Kiff highlights the need for central banks, particularly ones in smaller countries, to band together in order to successfully adopt digital currency while remaining competitive in the currency market. 

Both Kiff and Sheikh stressed the importance of the Central Bank Digital Currency Think Tank being as neutral as possible by remaining vendor and technology agnostic so the organization could provide a solid foundation for central banks that want to adopt digital currencies. Because many central banks do not have the resources to manage a major technology-driven undertaking like adopting CBDC, the Central Bank Digital Currency Think Tank can offer guidance and help central banks create a successful CBDC program that also protects their reputation. 

The idea of “platform agnosticism” could help central banks with deciding between a ledger-based system, blockchain, or a more centralized approach that banks already use. Oftentimes central banks are more interested in adopting CBDC than developing a system that works for their needs, so it is important for them to learn about available options so they can make the right choice. In fact, CBDC might not be the best solution for all banks, particularly those with limited resources. 

Another concern that central banks should be aware of is the risk of becoming overly dependent on CBDC, relying on it as the norm rather than an alternative to existing currencies. If a system fails, either by accident or because of hacking, that could result in thousands, if not millions, of people losing money that they had in CBDC. 

Central banks are also typically not well-equipped to make major decisions with a potentially global impact as often as would be required to fully transition to digital currencies, making it even more important for them to approach CBDC with a strategy in mind. As Sheikh describes it, if central banks make a misstep with CBDC, there could be serious geopolitical implications. 

Many central banks adopting a form of digital currency are concerned about the lack of regulation and standardization, which they really rely on. However, there is also widespread misinformation about how much of a risk these issues pose to central banks. Digital currencies like cryptocurrency have often been associated with bad actors, due to their use in illicit transactions and ransomware attacks, but a digital currency is not “bad” by design. 

To learn more about how central banks benefit from working closely together to adopt central bank digital currencies, watch the recording on the livestream

Further reading

Payments Conference Recap and the Future of Digital Payments

This week Tom and Shaun recap the Smarter Faster Payments Conference and discuss the future of cash and how it relates to digital banking and payments. Make sure to like and subscribe to stay up to date on all things cash and currency.