In recent years, the rapid advancement of mobile payments, trusted cloud computing, blockchain, and other emerging technologies has ushered in the rise of a new form of currency: digital currency. Much like the evolution of paper currency, innovations in electronic payment methods are making economic operations more efficient and convenient, while introducing entirely new forms of economic interaction.
Academic research on cryptocurrencies has been underway for many years, but it has largely focused on private-sector digital currencies. These quasi-digital currencies lack the attributes of real money. The 2018 G20 Summit in Buenos Aires reached a consensus on their nature: they are assets, not legal tender. Research on Central Bank Digital Currencies (CBDCs), however, is still in its early stages, and a unified definition has yet to be established.
A 2016 research paper from the Bank of England, "The Macroeconomics of Central Bank Issued Digital Currencies," defined a CBDC as an electronic, universally accessible, central bank-issued currency. The paper analyzed its potential effects on economic growth, inflation, interest rates, and other macroeconomic variables. Other studies have conceptualized CBDCs based on existing monetary forms, viewing them as an electronic version of cash, a general-purpose version of central bank reserve currency, or a centrally issued version of commercial bank account money.
The Digital Currency Research Institute of the People's Bank of China defines a CBDC as the currency of the digital economy era. It combines features of both electronic money and physical cash. In terms of value, it is a credit currency; technologically, it is a cryptographic currency; in implementation, it is an algorithmic currency; and in application, it is a smart currency.
Fundamentally, a CBDC remains a credit currency issued by the central bank to the public, falling within the M0 monetary supply category. It employs specific digital cryptographic techniques for issuance but does not alter money’s core functions: as a unit of account, a medium of exchange, a store of value, and a means of payment.
Unlike typical electronic cash, a CBDC allows for direct verification of ownership by the issuing bank. It enables peer-to-peer cash transactions through client-side digital wallets, reducing complete reliance on traditional bank accounts. In this process, the central bank primarily focuses on three tasks:
- Establishing the issuance process and system for the digital currency.
- Creating a secure distribution mechanism based on existing payment systems.
- Designing a framework to track the quantity, value, frequency of use, and distribution of CBDC transactions.
Advantages of Central Bank Digital Currencies
CBDCs offer several distinct advantages. Their anti-counterfeiting capabilities far surpass those of physical currency. They can be stored, wire-transferred, and traded across various digital payment systems. Combined with lower processing, storage, and transportation costs, this can further reduce the cost of use for consumers, making them more attractive than paper money.
Backed by national credit, CBDCs also hold an insurmountable advantage over private digital currencies. As the importance of cash gradually declines and various virtual currencies—often operating in regulatory gray areas—proliferate, introducing uncertainty and instability, the arrival of CBDCs appears inevitable.
Enhancing Financial Stability
CBDCs can improve financial stability by reducing the concentration of liquidity and credit risk. Currently, bank deposits are the primary method for public electronic payments. Even services like Alipay and WeChat Pay facilitate settlement by transferring deposits between bank accounts.
Introducing a CBDC-based payment system would allow individuals, private businesses, and non-bank financial institutions to settle transactions directly in central bank money, not commercial bank deposits. This could significantly reduce the concentration of liquidity and credit risk in the payment system, thereby lowering systemic risk in the banking sector. Furthermore, by providing a risk-free, highly liquid alternative to bank deposits, CBDC accounts could reduce the need for government deposit guarantees, helping to eliminate moral hazard in the financial system.
Fostering Competition and Innovation in Payments
As a new form of currency, CBDCs are conducive to competition and innovation within the payment system. They can offer alternative services to banknotes, checks, debit/credit cards, and online transfers, introducing more competition in retail payments.
CBDCs could also be used for large-value payments between banks and corporations. They could grant a wider range of financial institutions, even non-banks, access to the central bank's balance sheet. This would reduce the dependency of many small banks and non-financial institutions on the payment accounts and services of larger commercial banks, helping to lower transaction fees and enhance competitiveness. As a nearly cost-free medium of exchange, CBDCs would significantly boost the efficiency of the payment system.
Improving Financial Inclusion
The 2016 G20 Hangzhou Summit adopted the G20 High-Level Principles for Digital Financial Inclusion, encouraging countries to develop action plans that leverage digital technology to bridge the financial inclusion gap. However, challenges remain, including a lack of interoperability between mobile payment technologies, difficulties in effective regulation, and insufficient consumer safety guarantees.
Research from the IMF suggests that a CBDC could provide a universal electronic payment method. Its introduction would facilitate faster and more secure settlement of cross-border financial transactions, particularly benefiting low-income households and small businesses. These groups often rely heavily on cash, and small businesses face high transaction fees when processing cash or card payments. In many emerging economies and developing countries, promoting financial inclusion is a key motivation for exploring CBDCs.
A New Tool for Monetary Policy
CBDCs could potentially broaden the range of monetary policy tools available. Theoretical discussions focus on two main aspects:
- If a digital currency completely replaces cash, it could remove the effective lower bound on interest rates, allowing central banks to implement negative interest rate policies—a crucial tool for combating deflationary recessions.
- A digital currency could support quantitative easing by facilitating direct fund transfers from the central bank to individuals and businesses, stimulating aggregate demand and helping the central bank achieve its policy objectives.
👉 Explore more strategies for modern financial systems
Global Exploration and Key Challenges
The international community has already begun productive exploration of CBDCs. The Swedish Riksbank is one of the most proactive, having initially planned a pilot for 2019. The People's Bank of China is also a world leader in research and practical experimentation. Central banks in Canada, Russia, Senegal, Norway, Australia, Japan, and Singapore, among others, have initiated research into CBDCs. Some less developed economies, particularly in Africa, show strong willingness to take practical steps forward.
However, issuing a CBDC is a novel undertaking for any central bank, with no precedent to follow. Several significant challenges must be overcome.
Top-Level Design and Integration
A primary challenge is determining the top-level design that allows a CBDC to integrate effectively with the existing monetary system while minimizing disruptive impact. Currently, the ecosystem for virtual currencies is not mature enough for a fully virtual economy; CBDCs will coexist with traditional fiat currency for a long time.
This necessitates a design that incorporates the strengths of traditional currency, the essential attributes of a CBDC, and the capacity for future application expansion. In countries with strong dualistic structures, like China, network systems are highly developed in urban areas but absent in some rural regions. Therefore, legal and big-data top-level design must be a priority from the outset, deciding whether to serve financial efficiency or financial inclusion first.
Theoretical operational models for CBDCs include:
- Direct Model: The central bank issues currency directly to the public.
- Two-Tier Model ("Central Bank-Commercial Bank"): The central bank issues to and retrieves currency from commercial banks, which are then entrusted to provide CBDC services to the public. Both entities maintain the issuance and circulation system.
China currently favors the two-tier model. It leverages existing bank infrastructure, protecting prior investments and reducing the shock to the banking system. However, for financial inclusion, top-level design must also consider infrastructure construction and methods for promoting non-bank account access.
Addressing Security Challenges
Security presents another major hurdle, encompassing three areas:
- Technology Selection: Authorities must determine the scale of technological support needed for massive CBDC issuance and circulation. Choices involve using cloud or distributed computing to build private clouds, employing trusted computing, cryptographic algorithms, and secure chip technology for safety and privacy, or utilizing big data analytics and AI for business needs.
- Degree of Technical Security: Encryption is a key element for ensuring the security and trustworthiness of a CBDC. Critical technical issues include controlled anonymity, privacy protection, effective supervision, and private key management. Controlled anonymity is a particular technical challenge. Privacy protection alone requires resolving the矛盾 between individual privacy and central oversight, and between transaction privacy and registration/verification of rights. Risks like hackers stealing digital assets from wallets must also be prevented.
- Security Standard Design: CBDCs face risks of theft and loss. Policies to combat counterfeiting and fraud must be established.
Coordination Among Stakeholders
Strengthening coordination among digital financial service stakeholders is crucial. This group includes financial regulators, telecom regulators, securities commissions, financial institutions, telecom operators, and insurance providers.
Digital financial services require collaboration to achieve interoperability, injecting new vitality and liquidity into the digital payment ecosystem and enabling real-time settlement. Central banks need to establish relevant standards—covering operations, technology, and management—and implement overarching regulation for the entire digital finance ecosystem.
Understanding public demand is vital for increasing participation in the digital economy. Establishing comprehensive consumer protection mechanisms will enhance public confidence in CBDCs.
Considering Broader Risks and Global Impact
Policy standards must also account for other risks, including the potential impact of CBDCs on the global monetary system. Digital currencies circulating outside the traditional system pose severe challenges for cross-border payment supervision, particularly in anti-money laundering/counter-terrorism financing (AML/CFT), consumer protection, taxation, and capital controls.
Central banks must ensure they can obtain real-time information on exchange rates and cross-border capital flows to support monetary policy execution and maintain the stability of the international monetary system, all while safeguarding their ability to conduct independent monetary policy. Furthermore, consideration must be given to how the benefits of CBDCs can be shared globally in the near future.
The Bretton Woods system established the U.S. dollar as the pillar of the international monetary system and the world's reserve currency, cementing America's special role in the global economy. Similarly, central bank digital currencies represent a fundamentally new monetary form. While their true potential may not be immediately apparent, as a fundamental innovation within the monetary system structure, their implementation is destined to have a profound impact on national and global economic and political landscapes.
Frequently Asked Questions
What is a Central Bank Digital Currency (CBDC)?
A CBDC is a digital form of a country's fiat currency, issued and backed by its central bank. It is a direct liability of the central bank, making it a risk-free form of digital money, unlike private cryptocurrencies or commercial bank deposits.
How is a CBDC different from Bitcoin or other cryptocurrencies?
The key difference lies in centralization and backing. CBDCs are centralized, state-backed, and regulated, functioning as digital legal tender. Cryptocurrencies like Bitcoin are typically decentralized, not backed by any government or asset, and are considered volatile assets or commodities rather than official currency.
Would a CBDC replace cash and bank accounts?
Not immediately, and likely not completely. Most central banks envision CBDCs coexisting with cash and traditional bank accounts for the foreseeable future. They are designed to complement existing monetary options, not replace them outright, enhancing choice and resilience in the payment system.
What are the main benefits for everyday users?
Users could benefit from faster and cheaper digital payments, enhanced security features reducing fraud risk, greater accessibility for people without traditional bank accounts (improving financial inclusion), and the convenience of a state-backed digital cash alternative.
Are CBDC transactions private?
Privacy is a major design consideration. Most proposals aim for "controlled anonymity," where small everyday transactions are private, but the central bank has the ability to monitor and track larger transactions to prevent illegal activities like money laundering and fraud, balancing privacy with regulatory oversight.
How might CBDCs affect the banking system?
This is a critical area of study. A two-tier model, where central banks issue to commercial banks that then distribute to the public, is favored by many to prevent disintermediation of banks. It aims to use existing infrastructure while ensuring banks continue to play their vital role in lending and financial intermediation.