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More than half of the world’s central banks are exploring or developing digital currencies

Central bank digital currencies (CBDCs) are digital versions of cash that are issued and regulated by central banks. As such, they are more secure and inherently non-volatile, unlike crypto assets.

Although some may assume that CBDCs are a new concept, they have actually been around for three decades. In 1993, the Bank of Finland introduced the Avant smart card, an electronic form of cash. Although the system was finally abandoned in the early 2000s, it can be considered the world’s first CBDC.

But it’s only recently that research into CBDCs has proliferated globally, spurred by advances in technology and a decline in cash use. Central banks around the world are now exploring their potential benefits, including how they improve the efficiency and security of payment systems.

As of July 2022, there are nearly 100 CBDCs in the research or development stage and two fully launched: Nigeria’s eNaira, unveiled in October 2021, and the Bahamas Sand Dollar, which debuted in October 2020 .

Countries have different motivations for exploring and issuing CBDCs, but in the case of the Bahamas, the need to serve unbanked and underbanked populations on more than 30 of its inhabited islands has been a primary driving force.

Beyond promoting financial inclusion, leading experts say CBDCs can create greater resilience for national payment systems and foster greater competition, which can lead to better access to money. money, to more efficient payments and, in turn, to lower transaction costs. CBDCs can also improve the transparency of money flows and help reduce currency substitution (when a country uses a foreign currency in addition to or instead of its own).

While a CBDC may have many potential benefits on paper, central banks will first need to determine if there is a compelling case for adopting them, including whether there will be sufficient demand. Some have decided there isn’t, at least for now, and many are still struggling with this question.

Additionally, issuing CBDCs carries risks that central banks need to consider. Users could withdraw too much money from banks at one time to buy CBDCs, which could trigger a crisis. Central banks will also need to assess their ability to manage the risks posed by cyberattacks, while ensuring data privacy and financial integrity.

The rise of CBDCs

ANDRE STANLEY

ANDRE STANLEY is part of the Finance & Development team.


Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.