A CBDC, which means a Central Bank Digital Currency, represents the digital version of a country’s fiat money. Therefore, it is directly controlled by the central bank of a country.
With the popularity of cryptocurrencies increasing day by day, the interest in CBDCs has also increased in recent years. Since central banks see cryptocurrencies as a threat to be contained, they are turning to CBDCs. States wish to keep up with these financial instruments that are expected to replace the existing banking and financial sectors and have digital currencies they can control.
Since the emergence of Bitcoin, states have kept their distance from cryptocurrencies because of their uncontrollability, confidentiality and the possibility that they can be used for illegal purposes such as money laundering. Central banks also worry that cryptocurrencies might undermine their authority and control. Today, central banks want to maintain control over the supply and demand of money, and they consider digital currencies as a means to prepare for the cashless society that is certain to exist in the future.
Today, the use of cash is gradually decreasing thanks to the ease of cards, applications and contactless payment methods, and due to the risk of epidemics. It does not seem likely for a central bank to remove cash from the payment system, thus central banks are turning to CBDCs.
The 2018 annual report by UK Finance shows that 1 in 10 adults in the UK have gone mostly cashless thanks to contactless and online payment options. The number is much higher in Sweden. In a survey by Sveriges Riksbank, the central bank of Sweden, found that 4 in 10 Swedes do not use cash. Moreover, between 2010 and 2018, the percentage of individuals who paid cash on their last purchases decreased from 39% to 13%. Therefore, it is thought that the transition to the cashless society will occur in Europe and the use of cash will disappear in the future. It is also stated in the same report that the use of cash is expected to end by 2025.
The Bank of England defines a CBDC with the following features:
It potentially has much more functionality than cash in purchases.
It is accessible to everyone in a much broader scope than central bank reserves.
It differs from fiat money in form and operation, allowing it to serve different purposes.
For central banks to provide services with CBDCs, CBDCs must have the following features:
These digital currencies must be publicly available without any restrictions.
Digital currencies must provide the technology of the current payment infrastructure. In this way, they can be used in all transactions.
Central banks must create CBDCs on par with their reserves.
Fundamentally, cryptocurrencies and CBDCs are similar assets. They both run on blockchain, and they both serve similar purposes. However, central banks use the term “digital currency” instead of “cryptocurrency”.
Purposes and Advantages of CBDCs Over Fiat Money
Even though cryptocurrencies and CBDCs are similar, there are areas where they differ. Most of the cryptocurrencies are confidential and untraceable, but CBDCs differ in this respect. The main purpose of CBDCs is to create digital currencies that can be controlled by central banks and to capture the speed of transfer processing times and low transaction costs of cryptocurrencies. Central banks can also trace CBDCs. By nature, cash is difficult to trace, and that makes cash attractive for tax evasion, money laundering and illegal transactions. Cash also poses a big security risk since there is no obligation to keep records on each trading transaction. States can benefit from CBDCs to reduce all these crimes and track tax earnings more easily. Also, the declining use of cash has become an important reason for the emergence of secure CBDCs.
From everyday purchases to high-value transactions, CBDCs can improve both efficiency and security. In cases where CBDCs are used for all purchases in a country, parties can make transfers or purchases within seconds without even seeing each other. In interbank or cross-border payments, CBDCs will provide fast and traceable transactions. A study by the Bank of Canada, the Bank of England and the Monetary Authority of Singapore has shown that the use of CBDCs in cross-border and interbank payments has the potential to improve counterparty risk and will give confidence to both parties.
CBDCs of Countries
China is one of the countries that took the first step. PBOC, the People's Bank of China, has started to test the digital version of its fiat money, the Yuan, in some regions as a part of an ongoing project. Even though China’s CBDC is not commonly used in the whole country yet, China is expected to be the first country to issue a CBDC. Many countries are also working on CBDCs in Europe. When the approach, method and technology of digital currencies are considered, central banks are advancing at different speeds. While some central banks are in the testing phase, others are in the research phase.
A study by the Bank of International Settlement shows that 70% of central banks are working on CBDCs, and it is known that 5 of them have carried out pioneering projects. The most advanced and well-known of these projects is E-krona in Sweden. Sweden is in a much more advanced position than many countries when it comes to the implementation of CBDCs since it has a strong technological infrastructure and a very low cash utilization rate. The Bank of Canada and the Monetary Authority of Singapore also have examples of CBDC studies. Apart from these countries, Thailand, South Africa, Japan and the European Central Bank also continue their work. As a result, we may see CBDCs replace fiat money in countries soon.
