CBDCs advancing the cashless agenda

06 Oct 2021

The increasing and far-reaching global use of digital wallets, contactless, QR codes and cryptocurrencies, amongst other methods, are all accelerating the move towards a cashless society.
But one important factor that’s so often overlooked in speeding up this transition is the rise of central bank digital currencies (CBDCs).
CBDC’s are similar to cryptocurrencies, such as Bitcoin and Ethereum, in some regards, but differ in other key ways. They are likely to be less volatile and will come under the direct control of a central, government-backed authority, for example.
There’s a clear movement that’s building. A 2020 survey from the Bank for International Settlements showed that almost every central bank in the world at least did some research on these digital currencies. Some 60% are working on “proof of concept” testing, though just 14% have actually launched a pilot program or are in development.
Meanwhile, Chetan Ahya, chief economist at Morgan Stanley, said in a report for clients: “Efforts to introduce CBDCs are gaining momentum, with as many as 86% of the world’s central banks exploring digital currencies. A major move to introduce central bank digital currencies could actually disrupt the financial system.” 

China’s CBDC advance

China – which has the world’s second largest economy - has overtaken much of the developed world in its establishment of a digital yuan earlier this year.
The pilot system is a two-layered system with the central bank controlling the core layer using conventional technologies and banks serving as intermediaries in the same way they do for cash. And banks can use smart contracts for programmable money.  
“The People’s Bank of China chose a conventional technology approach for CBDC because of the immaturity, performance, and scalability challenges that blockchain presents,” reports Ledger Insight.
China’s advance in the digital currency arena could compromise the U.S. dollar’s status as the world’s reserve currency. Though China said that is not its objective, a Bank of America report notes that issuing digital dollars would let the U.S. currency “remain highly competitive … relative to other currencies.”
“CBDCs offer the benefits of improving monetary transactions, without the adverse side effects of crypto currencies,” Bank of America economist Anna Zhou has said.

CBDCs advocates’ arguments

The arguments for digital money instead of cash have gained traction during pandemic, not just for health and safety reasons, but also for the swiftness by which certain digital payment services allow transactions to take place.
For instance, in the U.S., during congressional debates on the Care Act, a considerable conversation was centred around the introduction of a central, digital U.S. dollar.
Advocates of CBDCs say they are a solution to ensuring real-time transfer of value. Another positive, say proponents, would be that CBDCs can solve issues involving discrepancies in reconciliation in central banks and on a wider level, with the collection of taxes.