CBDCs: Modernizing national economics into cashless societies

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  Quantumrun Foresight
• February 22, 2022

Insight summary

Central Bank Digital Currencies (CBDCs), digital versions of a country's currency managed by its central bank, are transforming the way transactions are conducted. These digital currencies, distinct from cryptocurrencies due to their centralized nature, are being explored by numerous countries, with some already implementing their own versions. The rise of CBDCs could lead to increased financial inclusion, challenge the dominance of traditional reserve currencies, and require changes in sectors tied to traditional money handling.

Central Bank Digital Currencies (CBDC) context

CBDCs are essentially digital versions of a nation's official currency, which are issued and overseen by the central bank of that country. Unlike traditional forms of money, CBDCs are exchanged exclusively in an electronic format, marking a significant shift in how transactions are conducted. This new form of exchange is not just a concept but is gradually becoming a reality, with several countries actively researching and developing their own digital currencies.

CBDCs share some similarities with cryptocurrencies, but they are not the same. While both are digital, CBDCs are centralized and their value is tied to a country's official currency, making them more stable. This is why they are often referred to as digital stable coins. A report by CoinTelegraph reveals that 87 countries around the globe are currently exploring the potential of digital currencies. Among these, five nations have already taken the leap and introduced their own digital currencies. China is leading the pack with the introduction of the Digital Currency Electronic Payment (DCEP) system, also known as the digital yuan.

The proposed system for CBDCs is designed to make them a practical means of exchange. It is expected to operate on a two-tier system, mirroring the distribution of physical cash. In this setup, the central bank would distribute the digital currency to commercial banks, which would then make it available to consumers. This transaction could be done through mobile applications, making it easy for people to access and use the digital currency. Consumers would then have the freedom to use this digital currency for legal transactions, such as buying groceries or converting their physical cash into the equivalent amount of digital currency. 

Disruptive impact

In developing nations, a large portion of the population often lacks access to traditional banking services. The implementation of digital currencies could provide a platform for these underserved communities to participate more fully in the local financial system. By offering a direct, digital link between central banks and consumers, CBDCs could bypass the need for third-party intermediaries, making financial services more accessible and efficient for everyone.

The rise of CBDCs could also have profound implications on the global stage. For instance, the launch of China's digital yuan could challenge the dominance of the US dollar as the world's leading foreign exchange reserve currency. This development would allow countries to conduct transactions directly with each other, without the need to convert their currency into US dollars first. This shift could streamline international trade, reduce transaction costs, and potentially reshape the dynamics of global economic power.

While CBDCs are not expected to completely replace physical cash or cryptocurrencies, they could significantly reduce the cost of doing business within the global financial system. By offering a more efficient, secure, and accessible means of exchange, CBDCs could encourage a more inclusive and streamlined financial ecosystem. This development could lead to increased economic activity and growth, particularly in regions where access to traditional banking services is limited. 

Implications of Central Bank Digital Currencies

Wider implications of CBDCs may include:

• Monetary policy and fiscal stimulus, influenced by central bank economists, having a greater influence or impact on the financial decision-making of a nation’s population (assuming a significant majority of the population begins using their country’s CBDC).


• Central banks and the various banks under them gaining greater insights into the financial transactions of consumers, thereby improving the field of economics long-term. 


• Phone companies developing features and functionalities that will support the use of CBDCs as a form of payment. 


• Heightened government sensitivity around privacy laws due to CBDC transactions being visible and potentially monitored by government authorities. 


• CBDCs competing with existing payment systems owned and supported by credit card and technology companies.


• A significant decrease in the use of physical cash, resulting in less environmental waste from the production and disposal of paper and coin currencies.


• Job losses in sectors tied to traditional money handling, such as banking and armored transport services, requiring a shift in labor market dynamics and re-skilling efforts.


• Enhanced transparency of financial transactions, making it more difficult for illegal activities to go unnoticed, leading to a decrease in financial crimes, such as money laundering and tax evasion.


• Increased vulnerability of the financial system to cyber attacks, leading to the need for enhanced cybersecurity measures and regulations to protect consumers and maintain the stability of the financial system.

Questions to consider

• Do you support the further digitization of money and central banks having a direct relationship with consumers through CBDCs? What are the reasons for your stance? 


• How will the banking industry be affected if CBDCs gain wider use?