Central Bank Digital Currencies for Dummies – A Quick Guide into CBDCs

The Paypers releases the Central Bank Digital Currencies for Dummies, an ebook which is a quick reference guide into CBDCs that aims to inform readers about what CBDCs are, the innovation they promise, the implications, and risks they pose.

The international debate on Central Bank Digital Currency (CBDC) is gaining momentum. The world has been sieged by CBDC initiatives that aim to digitalise payments, encourage financial inclusion, improve cross border payments, support fiscal transfer, etc. What is firing up discussions around this topic and why is it important today?

To help our readers better understand what Central Bank Digital Currencies are and encourage them to engage in discussions, The Paypers asked experts from the Dutch Central Bank, Consult Hyperion, Currency Research, eCurrency, Innopay, Mastercard, and Sögur (formerly known as Saga Monetary Technologies) to share their know-how on the possibility and the potential these initiatives hold, but also the risks and implications. Their valuable expertise has been gathered in Central Bank Digital Currencies for Dummies – A Quick Guide into CBDCs, which is a collection of educational articles and interviews on CBDC written between July – November 2020.

Some of the key aspects stressed by the experts featured in our ebook include:

• What are CBDCs and why they might be useful for end consumers and businesses, locally and across the globe - ‘CBDC could also act as a back-up for the critical infrastructure in the payment system. Cash currently has a function as back-up during failures in non-cash payments. This function could come under pressure due to the declining use and acceptance of cash.’ Harro Boven, the Dutch Central Bank;

• How can technology support the innovation CBDC bring to the payments landscape – ‘eCurrency designed, built, and piloted the Digital Symmetric Core Currency Cryptography (DSC3) technology to enable central banks to issue, control, and supervise digital fiat currency that is then distributed through commercial banks and payment service providers.’ Lars Arvidsson, eCurrency;

• Why should CBDCs operate with existing payment rails – ‘A CBDC fully integrated with an existing payments infrastructure, leveraging the role of banks and licensed wallet providers, will promote competition and accessibility and will enable CBDCs to leverage continued innovation from the private sector.’ Raj Dhamodharan, Mastercard;

• What CBDC projects have captured the media’s attention? Do they stand a chance – ‘The world is changing, our daily life is changing (has changed a lot since the beginning of 2020), therefore it was necessary that something happened to the good old ‘euro/dollar/Romanian leu’ bill.’ Mirela Ciobanu, The Paypers;

• Will a ‘digital dollar’ enjoy the same popularity as its current physical version – ‘Libra’s initiative will provide a global infrastructure for digital token exchange, complementing and accelerating the already existing nascent infrastructures of Bitcoin and Ethereum. CBDC can use this new infrastructure as well, by integrating the FED digital dollar system into these rails. This increases the utility of CBDC as it will have a global reach instantly. This also helps to enforce the US dollar position in the world economy.’ Douwe Lycklama, Innopay;

• Can China’s digital currency supplant a digital dollar as a global reserve currency – ‘If Chinese digital currency becomes widely used by a couple of billion people, starting with those along the ‘belt and road’ trading corridors, they may well find it more than a little convenient to order goods from a Chinese partner via WeChat and settle via Alipay.’ David Birch, Consult Hyperion;

• Could Facebook’s Libra solve the digital identity crises and KYC processes in some parts of the world be replaced by Known- by-Zuck (KYZ) - David Birch, Consult Hyperion;

• Is CDBC the key to unlocking financial inclusion – ‘A CBDC can easily be distributed via these channels [mobile devices], removing the need to use cash to move money in and out of a closed-loop mobile payments system, or even the need for a commercial bank account.’ Gonzalo Santamaria and Jens Seidl, Currency Research;

• How secure and private CBDCs are – ‘CBDC transactions will be pseudonymous, not anonymous. If the central bank wants to see where and how much an individual is spending, it can. Anonymity disappears when cash does. While that will make life difficult for money launderers and terrorists, it could also become a tool to punish political activism.’ Barry Topf, Sögur.

All in all, CBDCs are an exciting and innovative perspective to consider when talking about the future of money/transacting. Because it has a great impact on financial systems and monetary policies, the topic of CBDC is constantly debated and we expect more proof of concepts/trials to happen in the coming months and more articles and reports coming out.