A Brief Look at Developing CBDCs

Digital currencies continue to rise, with cryptocurrencies and Central Bank Digital Currency (CBDC) becoming hot topics among financial institutions. CBDC is a virtual form of a country’s fiat currency, a store of value that can be used to make digital payments for goods and services. It is controlled by the central bank of a nation.

CBDCs are currently presenting a great opportunity in the industry – as discussed in a previous blog, banks and financial institutions can take advantage of the digital currency’s growing popularity and take the lead in embracing digital trends that has the potential to bring value and benefits to both banks and consumers.

CBDCs offer attractive benefits: according to our e-book, it provides businesses and consumers privacy, convenience, transferability, accessibility, and financial security. From a broader perspective, it may also simplify the maintenance of complex financial systems, offer financial inclusion, and provide new sources of funding for citizens.

As financial institutions and the industry look into CBDCs, it is important to reassess current strategies, technologies, and capabilities before developing and implementing this digital currency. According to the e-book, there’s information to consider and decisions to be made – let us take a quick dive and examine a few key points.

• Issuance and management models: In a direct model, central banks are responsible for all aspects of the CBDC system. This includes account-keeping, identity verification, and issuance. On the other hand, an indirect model sees central banks issuing CBDCs indirectly to consumers through banks, service providers, and other intermediaries.
• Technological infrastructure: Central banks must be equipped with the right technological infrastructure to accommodate digital currencies. In the case of CBDCs, its infrastructure can be based on a conventionally controlled central database, or on a distributed ledger technology. Valuable characteristics to consider include a highly strong cybersecurity, tech stability, setting the highest technical governance standards, and resilience.
• Instrument design: Central banks need to choose whether the CBDCs would pay interest or would act simply as a store of value. Decisions surrounding whether CBDCs would provide an experience like physical cash (interest-free) or a more “deposit-like” design (interest-bearing) would need to be considered. The latter may be more attractive, but risks include loss of deposits by banks.
• Degree of anonymity: Digital transactions leave a trail. This might pose as a challenge when it comes to enticing the public to adopt CBDCs, especially those consumers who value their privacy and prefer anonymity when making purchases.

Read our e-book “Two Critical Trends Transforming Financial Institutions” in full to learn more about digital currencies and their potential in transforming the industry! Download now.