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Central bank digital currencies - what’s the big story?

Central bank digital currencies, or CBDCs for short, have been called ‘a concept whose time has come’. Ironically for an age when cryptocurrencies or ‘decentralised finance’ are on the rise, it seems that major central banks are exploring the merits of digital versions of their own currencies. It’s thought the European Central Bank could be ready to launch by 2025. We take a look at the why, and the why now.

Internet transactions, whether banking or buying and selling have become commonplace. Typically, they are made via an intermediary, whether the online version of a traditional bank or a digital age entity, such as PayPal. These private companies ‘own’ the data generated by each transaction and they also earn a fee. Their business is ultimately supported by a central bank. But what if the central bank were to access the customer directly, via an electronic version of their own currency?

Appetite for digital transactions has been clearly demonstrated. So how would it work? Unlike cryptocurrencies, which are token-based, CBDCs would be account-based, much like a traditional bank. Transaction costs would be lower, however, and access almost universal. Central banks could also be more respectful of personal data than a private company, less likely to hoard it for their own business development. The role of the financial intermediary might diminish or even become a thing of the past.

Advanced trials have taken place in China, via a pilot programme for the digital renminbi or ‘e‑yuan’. The Lunar New Year 2021 was marked in several cities by a public lottery to win ‘red packets’ of Rmb200 ($31). The winnings were downloaded to a smartphone and used to make purchases. The aim is for a wider rollout to coincide with the Winter Olympics in 2022. If successful, the e-yuan could eventually curb the rise of private operators such as Alipay.

The attractions of a CBDC to a central bank are clear. Unlike anonymous cryptocurrency transactions, which at the worst enable tax evasion, crime and terrorism, all transactions are transparent. But there is perhaps a more sinister side even here. Central banks, and potentially governments, would be able to monitor mass or even individual spending patterns in real time. CBDCs would become not simply a valuable source of Big Data, but potentially also a powerful surveillance tool.