What exactly is a Central Bank Digital Currency (CBDC) and how is it different than your credit card? A Central Bank Digital Currency is backed by a government’s central bank, which means they hold the liability, not your private bank. As decentralized digital currencies like bitcoin have become more popular the world’s central banks are beginning to realize they need to get in the game or let the evolution of money pass them by.
Last month, China announced a pilot project of its digital Yuan in four cities. This month, the US is considering implementing a digital dollar. In a new project by the Atlantic Council Global Business and Economics Center and Harvard University Belfer Center we will begin tracking what the world is doing on central bank digital currencies:
The ABCs of CBDCs
(Information adapted from Belfer Center and the International Monetary Fund)
What is it?
A Central Bank Digital Currency (CBDC) is the digital form of a country’s fiat currency. Instead of printing money, the central bank issues electronic coins backed by the full faith and credit of the government.
Why is it different than my credit card?
CBDCs are the liability of the central bank, which means the bank must maintain reserves and deposits to back it up, rather than a private bank.
But don’t digital currencies already exist?
There are already thousands of virtual currencies, commonly called cryptocurrencies. These could be centralized, but they are not from the government – think of Facebook’s Libra. The fully decentralized version is bitcoin and its competitors. Cryptocurrencies run on distributed-ledger technology, meaning that multiple devices all over the world are constantly verifying the accuracy, not one central hub.
So why would a government get into virtual currencies?
Lots of reasons. Here are just a few according to the IMF: The cost of managing and transferring cash is high and this technology can reduce expenses; financial inclusion means those who are unbanked can get access to money on their phone; private companies need competition so they meet transparency standards and limit illicit activity; monetary policy can flow more quickly and seamlessly through CBDCs.
So what’s the downside?
There are several, and each one needs careful consideration before a country launches a CBDC: Citizens could pull too much money out of banks at once and buy CBDCs, triggering a run on banks and higher interest rates on consumers; centralizing through the government a system designed to be private may produce a backlash among users; our regulatory processes are not updated to deal with the new forms of money.
What are the national security implications of a CBDC?
This is a topic we will continue to work on at the Atlantic Council. Right now, the United States is able to monitor and regulate payment flows in dollars all over the world. But new payment systems could limit the ability of policymakers to track cross-border flows. This presents major challenges to the use of sanctions and economic policy tools, especially since countries may try to switch payment systems and avoid detection.