At the other end of the GDP spectrum, micronations such as Palau in the western Pacific – where certain financial transactions still require loading cash onto boats that sail between the nation’s 500 islands – see CBDCs as an opportunity to leapfrog toward the digital era with futureproofed tech. Between China and Palau, in the spectrum of CBDC programmes, are more than 100 countries representing over 95 per cent of global GDP.
For governments and central banks, the benefits of a CBDC upgrade from fiat currency are undeniable, including efficiency, cost, inclusion, oversight, transparency, enforcement and collection. It represents a wholesale modernisation of the entire infrastructure of money.
In the finance sector, for example, CBDCs can offer greatly improved efficiency in payments – both domestic and cross-border. This means faster payment processing times and transfers that take seconds instead of days or weeks. This is an essential improvement for international commerce.
CBDCs offer tighter control over monetary policy
As CBDCs become more common, central banks will be able to maintain a higher degree of control over the flow of currency, while still enabling citizens to make contactless payments without leaving the purview of the central bank. CBDCs also provide central banks with unprecedented control over fiscal and monetary policies. As national responses to the Covid-19 pandemic proved, effective implementation of monetary policy can be a matter of life and death.
In addition, CBDCs provide an effective use case for government use of blockchain technology. Responsible design and policy choices (such as employing messaging layers) may give the government the tools it needs to prevent illicit activity. Technology can enable central banks to ensure that both privacy and cyber security are embedded in the design. “Cryptocurrencies are by their very definition decentralised, making them difficult for governments to exert control over,” explains Nick Maynard, author of Juniper Research’s latest paper on CBDCs. “In contrast, CBDCs are centrally issued and regulated. As such, developing a CBDC at the same time as cracking down on more traditional cryptocurrency is an understandable approach.”
