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Central Bank Digital Currencies (CBDCs) “do not change the definition of money, but will likely change how and when value is transferred over the next 15 years,” Bank of America analyst Alkesh Shah wrote in a note Tuesday.
Note CBDCs are a type of digital currency issued and backed by a central bank (think Federal Reserve, European Central Bank, etc.) instead of a commercial bank. In essence, they are a digital form of a country’s fiat currency, such as the U.S. dollar (DXY) and euro, designed to boost efficiency and reduce costs typically through the use of blockchain technology.
“CBDCs have the potential to revolutionize global financial systems and may be the most significant technological advancement in the history of money,” Shah contended. As of now, 114 central banks are exploring CBDCs, up significantly from 35 in May 2020, he added.
In the meantime, financial systems are built on centralized infrastructure that requires third-party intermediaries, which “limits efficiencies, interoperability, innovation and functionality, such as conditional payments.” Distributed ledgers, though, are built on decentralized infrastructure that “removes fragmentation and the need for intermediaries, which increases efficiencies, interoperability and innovation and expands functionality by replacing APIs with smart contracts.”
There are risks involved with CBDCs, Shah warned, depending on their design and issuance. He expects central banks in developed economies to start focusing on payments efficiency, while those in developing economies will focus initially on financial inclusion.
One of the big risks is that CBDCs could drive competition with bank deposits, potentially leading to a loss of monetary sovereignty and inequality among countries across the globe, according to the note.
In November 2022, Japan’s central bank was said to conduct CBDC experiments with three banking giants. Take a look at SA contributor Richard Lehman’s clarification on CBDCs.
