Central Bank Digital Currencies (CBDCs) have the potential to be the most pervasive innovation in the digital and payments space which will fundamentally impact all participants in the global financial services industry.
A Central Bank Digital Currency is an innovation in the form of money issued as well as the underlying infrastructure on which payments can be transacted.
A CBDC is a digital payment instrument, denominated in the national unit of account, that is a direct liability of the Central Bank (BIS 2020, 3). It is the legal tender issued by the Central Bank in a digital form as a medium of exchange, store of value and unit of account. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.
Currently, only commercial banks and certain permitted financial institutions can hold Central Bank money in the form of ‘reserves’ while the retail public can hold money issued by the Central Bank only in form of physical bank notes. In its electronic form, CBDCs have the potential to be widely used by wholesale financial institutions, households and businesses to store value and make payments in a more secure way.
With cash usage declining over most economies, CBDCs can play a role in maintaining and streamlining the Central Bank’s function of providing money, financial stability and ensuring continued access in a purely digital economy.