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Why Central Banks Around the World are Actively Pursuing CBDC Projects

November 16, 2023

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CBDC Concepts

Over 40 countries approached the IMF for assistance in developing effective governance and technology to launch CBDCs. Is your FinTech ready?

In an increasingly digital global economy, central banks worldwide are exploring ways to introduce central bank digital currencies or CBDCs. Inspired by decentralized and trustless cryptocurrencies, Central Bank Digital Currencies are a way to digitize fiat currency and regulate capital flow in an increasingly global digital economy. The legal national digital tenders may share the throne with fiat currencies. At the same time, their one-to-one exchangeability will need to be maintained.

According to the Atlantic Council, a global think tank to address economic and political challenges, a total of 130 nations that represent 98% of the global GDP are actively pursuing CBDCs, while 11 have fully launched a digital currency. The transformational potential of this nascent medium of value exchange is driving the accelerated momentum of the exploration of CBDCs. In its attempt to stay on top of consumer trends, The Bank of Canada has announced that it is exploring the idea of issuing a CBDC and is brainstorming on its features and usage dynamics. The US, on the other hand, is still evaluating the level of impact the introduction of a digital version of the greenback will have on the domestic economy and global financial ecosystem.

Source of Data:  Atlantic Council

In the words of Swift’s CEO and Regional Head, of India and South Asia, Kiran Shetty, “Digital currencies have a huge potential to shape the way the world would transact in the future, but this potential will only be realized if the different approaches that are explored can connect and work together.”

In fact, the value of transactions processed by CBDCs is projected to reach $213 billion, growing by a whopping 260,000%, from 2023 to 2030.

Factors Driving Central Banks to Launch CBDCs

The cryptocurrency market cap stood at $1.32 trillion in the beginning of November 2023, demonstrating impressive year-on-year growth from the $727.58 billion recorded on November 21, 2022. The massive rate of adoption of digital currencies during a time when faith in traditional banking systems is being tested has called the attention of governments worldwide to cryptocurrencies. The trend among consumers of taking funds out of the traditional economic system and investing it into the digital ecosystem has raised significant concerns about the role of central banks and economic policies in the monetary system.

The role of banks as payment innovators was already threatened by FinTechs and NBFCs in the digital economy. Cryptocurrencies proved that it was time for traditional financial institutions to catch up with the changing needs of the global financial system. The possibility of erosion of their role as the cornerstone of the economy is another factor pushing them toward introducing digital currencies..

Along with the huge potential to become instruments of financial inclusion, CBDCs present a massive opportunity to reduce the cost of issuing and distributing physical money. A move to the digital realm could also help increase central banks’ share of wholesale funding. Additionally, CBDCs offer an opportunity to de-dollarize the global financial landscape, simultaneously countering cryptoization. Finally, this is an opportunity for central banks to catch up in the instant payments race while lowering transaction costs.

Considerations while Implementing CBDCs

Establishing CBDCs as the primary mode of payments successfully will need central banks to overcome several hurdles.

Ensure National and International Interoperability

Central banks will need to ensure seamless interoperability among domestic and cross-border payment systems to facilitate coordination at the global level.

Risk to the Banking Sector

Citizens may be driven to pull out massive amounts of fiat currency to purchase CBDCs. This may have catastrophic effects on the banking system. It could even impact banks’ lending capabilities and interest rates. Further, central banks will have to develop guiding principles for minting or burning new currency.

Resilient Underlying Technology Layer

Maintaining the highest levels of security to protect CBDC networks against cybercriminals and geopolitically hostile nations is critical, just like any internet-based system. Technically, CBDCs are virtual currencies that will rely on the stability of the underlying network. The Russia-Ukraine conflict has highlighted that geopolitical tensions could escalate into cyberattacks and with currencies becoming digital, this raises serious concerns.

Strengthening the Payments Framework

To offer seamless operations, central banks and regulatory bodies will have need to develop stringent compliance frameworks to ensure customer privacy while maintaining transparency, ensuring smooth money flows, developing anti-money laundering standards for digital currencies, and refining fiscal and monetary policies to ensure the efficient cohesive operation of fiat and programmable money.

Ensuring Accessibility and Inclusivity

Despite extensive banking systems, several nations have huge unbanked and underbanked populations. The launch of CBDCs must facilitate the elimination of this divide and promote higher levels of inclusion through safe transaction facilities.

Fintechs, Payment Facilitators, and Credit Unions Must Prepare for the Seismic Shift

The World Economic Forum emphasizes global coordination, knowledge sharing, and establishing guiding principles collaboratively as key to building a harmonious ecosystem of CBDCs. All kinds of financial institutions, including traditional and neo-banks, FinTechs, and credit unions, must catch up with the evolving payments landscape to maintain a competitive advantage in the digital-first world of the future.

CBDCs possess the colossal potential to alter national and global payment systems. The disruptive transition is expected to present a plethora of opportunities for FinTechs. Since it is expected to promote financial inclusion, FinTechs will have a greater market to serve. Being leaders in payment technology, ahead of banks, they can lend technological expertise and insights to collaboratively drive the development of CBDCs. CBDC enablement will boost revenues and elevate the customer experience by providing a cheaper alternative to traditional cross-border payments.

The good news is that FinTechs have the upper hand when it comes to leveraging cutting-edge technologies to make cheaper and faster payments accessible. However, CBDC adoption can be challenging due to evolving and strict oversight. Partnering with Opus Technologies, the leading digital payments expert with 27+ years of experience in financial technology, can accelerate your transition. We can ensure a minimally disruptive migration process while mitigating cost overheads by leveraging cloud-based AI tools to minimize resource requirements. Schedule a call NOW to learn all about how our CBDC-enablement services can give you a competitive edge in the evolving digital payments landscape.

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