What exactly is a Central Bank Digital Currency (CBDC)? A CBDC is virtual money backed and issued by a central bank. As cryptocurrencies and stablecoins have become more popular, the world’s central banks have realized that they need to provide an alternative—or let the future of money pass them by.
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Race for the future of money
The ABCs of CBDCs
What is a CBDC?
A Central Bank Digital Currency (CBDC) is the digital form of a country’s fiat currency that is also a claim on the central bank. Instead of printing money, the central bank issues electronic coins or accounts backed by the full faith and credit of the government.
But don’t digital currencies already exist?
There are already thousands of digital currencies, commonly called cryptocurrencies. These can be issued by private companies or be fully decentralized. Bitcoin is the most well-known fully decentralized cryptocurrency. Another type of cryptocurrency are stablecoins, whose value is pegged to a commodity or a fiat currency like the dollar. Cryptocurrencies run on distributed-ledger technology, meaning that multiple devices all over the world, not one central hub, are constantly verifying the accuracy of the transaction. But this is different than a Central Bank issuing a digital currency.
So why would a government get into virtual currencies?
There are a lot of reasons to explore virtual currencies, depending on the economic situation within a country. Here are just a few according to the International Monetary Fund: CBDCs are more cost efficient than physical cash as they have lower transaction costs; they can promote financial inclusion, meaning those who are unbanked can get easier and safer access to money on their phone; they can compete with private companies that need incentives to meet transparency standards and limit illicit activity; and they can help monetary policy flow more quickly and seamlessly.
What are the challenges?
There are several challenges, and each one needs careful consideration before a country launches a CBDC. Citizens could pull too much money out of banks at once and purchase CBDCs, triggering a run on banks. Centralizing, through the government, a system designed to be private may produce backlash from users and create cybersecurity risks. Regulatory processes are not updated to deal with the new forms of money and need to be made more robust before adopting this technology.
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 most digital payment flows of dollars all over the world. But new payment systems could limit the ability of policymakers to track cross-border flows. In the long term, the absence of US leadership and standards setting can have geopolitical consequences, especially if China maintains its first-mover advantage in the development of CBDCs.
Research Team: Nitya Biyani, Niels Graham, William Howlett, Amy Jeon, Reddy Lee, Varsha Shankar, Stefan de Villiers
To read more about the project you can access our press release here.
New Atlanticist Feb 19, 2021
How Janet Yellen can help deliver the digital dollar
By Josh Lipsky, JP Schnapper-Casteras
What precisely will the US Treasury Department do about the rise of digital currencies? Secretary Yellen and Federal Reserve Chairman Jerome Powell should quickly harness the potential of these evolving financial tools, including a US-backed digital dollar.
Apr 20, 2021
Digital payment systems are bringing millions of unbanked and underbanked online and rapidly revolutionizing global finance. But new technology brings new challenges. From cybersecurity to sanctions evasion to money laundering. Should more governments step in and create their own Central Bank Digital Currencies (CBDCs)? What are China’s ambitions for its digital yuan? Can a transatlantic cooperative project can set new standards on digital currencies and ensure stable and transparent cross-border payments?
Testimony Jul 27, 2021
Friedlander testifies to the House Committee on Financial Services regarding US leadership on central bank digital currency development
By Julia Friedlander
C. Boyden Gray Senior Fellow and GeoEconomics Center Deputy Director Julia Friedlander testifies to the House Committee on Financial Services regarding central bank digital currencies.
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