The Rise of Central Bank Digital Currencies (CBDCs)

In the last decade, the advent of new technologies and information systems has shaken the banking and financial ecosystem. Driven by the decline in consumer cash usages and the rapid emergence of new forms of payment methods by fintech firms, central banks globally are exploring the possibility of replacing cash banknotes with Central Bank Digital Currencies (CBDC).

What is a CBDC?

In essence, a CBDC is a new form of money, issued and governed by a country’s central bank. As a digital representation of fiat, it would benefit from the trust inherent in fiat currency and, like cash, would not be subject to credit risk. In contrast, cryptocurrencies, e.g. bitcoin, are governed by disparate online communities and are too volatile to be a reliable store of value.

Whilst most CBDC projects are still in the conceptual stage, CBDCs are rapidly becoming a reality. The Bank of International Settlements (BIS) has reported that 80% of central banks are engaging in the development of CBDCs and 10% have completed pilot projects.[1] The BIS and seven central banks including the Federal Reserve, European Central Bank and the Bank of England have also published a report on the key requirements for CBDCs.[2]

Commercial Implications

Whilst the impact of CBSCs will vary depending on the exact model adopted by each country, its inception would herald a pragmatic shift in global financial systems. 

For instance, by replacing cash banknotes with CBDCs, central banks have reported that this would enhance the efficiency of payment systems and reduce transfer and settlement times; thus, stoking economic growth.[3]

Additionally, CBDCs could improve the trust efficiency and payment functionality among different commercial players by offering real-time peer-to-peer payments to retail players, and facilitating a broader access of institutions to high value payment in the wholesale industry.[4]

Legal Implications

Unsurprisingly, the coherence of CBDCs and consumer data protection laws has been the main point of contention. Whilst system developers have claimed that data collected through CBDCs will be harvested according to individual sharing and advertising preferences, the fact that each CBDC transaction is recorded and stored under one central authority raises public concerns on the transparency and potential misuse of data.[5] EU regulators will also have to address the conflict between immutable CBDC transactions and the ‘right to be forgotten’ under the GDPR.[6]

Another major concern for central banks is the possible disintermediation in the commercial banking sector. Such a consequence would contradict “the smooth conduct of policies pursued by the competent authorities relating to…the stability of the financial system” (Article 127(5) TFEU).[7]

Conclusion

CBDCs hold enormous potential. Nonetheless, the possible adverse impact of CBDCs on financial and regulatory landscape must not be neglected. Any decision to launch a CBDC should be taken with caution.

[1]  Codruta Boar, Henry Holden and Amber Wadsworth, ‘BIS Papers No 107’ (BIS, January 2020) <https://www.bis.org/publ/bppdf/bispap107.pdf> accessed 14 November 2020

[2] Ryan Browne, ‘Central banks are considering their own digital currencies – this is what they could look like’ (CNBC, October 2020) <https://www.cnbc.com/2020/10/09/central-banks-lay-out-a-framework-for-digital-currencies.html> accessed 14 November 2020

[3] Tom Wilson, ‘Explainer: Central bank digital currencies - Moving towards reality?’ (Reuters, January 2020) <https://www.reuters.com/article/us-cenbank-digital-currencies-explainer-idUSKBN1ZM2JH> accessed 14 November 2020

[4] Central Bank Digital Currency – Benefits and drawbacks <https://www.pwc.com/gx/en/financial-services/pdf/the-rise-of-central-bank-digital-currencies.pdf> (PwC, 2019) accessed 14 November 2020

[5] Kun Hu, ‘CBDC Privacy and Transparency: Double-Edged Sword of Blockchain’ (Blockchain.News, September 2020) <https://blockchain.news/analysis/cbdc-privacy-and-transparency-double-edged-sword-of-blockchain> accessed 14 November 2020

[6] Ibid. 4

[7] Hossein Nabilou, ‘Central Bank Digital Currencies: Preliminary Legal Observations’ (University of Oxford, February 2020) <https://www.law.ox.ac.uk/business-law-blog/blog/2019/02/central-bank-digital-currencies-preliminary-legal-observations> accessed 14 November 2020