Central Bank Digital Currency: Advantages, Disadvantages, and Global Adoption

Introduction

Central Bank Digital Currency (CBDC) continues to be a trending topic in the financial world in 2023, representing a digital form of a nation's fiat currency issued and regulated by the central bank. While traditional currencies are still relied on and most likely will continue to be to some extent, CBDCs have gained traction due to their potential benefits. However, they also face several challenges, and their adoption varies across different countries due to economic objectives. Some of the advantages and disadvantages frequently discussed are explored below.

Advantages of Central Bank Digital Currency

Financial Inclusion

One of the primary advantages of CBDC is its potential to promote financial inclusion. Approximately $1.5 billion unbanked individuals in the United States provide a huge opportunity to facilitate financial inclusion. CBDCs can benefit individuals who are underserved or excluded from the traditional financial system by providing access to digital payment systems and banking services. 

Reduced Transaction Costs

CBDC transactions can potentially reduce the costs associated with cash handling and traditional banking services. In 2022, the United Kingdom’s House of Lord’s Economic Affairs Committee produced a report on the implementation of CBDCs. The report indicated that through competition and cost effectiveness, the fees associated to banking services would be greatly reduced by use of a CBDC alternative. This would additionally beneficial for cross-border transactions, which are often time-consuming and expensive. 

Monetary Policy Transmission

CBDCs could enhance the effectiveness of monetary policy. Central banks can directly influence the money supply and control interest rates through CBDC, ensuring better control over economic stability and inflation. Although there are arguments to a negative effect on monetary policy, if done correctly it does have positive potential.

Enhanced Security and Transparency

CBDC transactions are recorded on a blockchain or other distributed ledger technology, providing robust security and transparency. It could potentially be achieved by ensuring that a transaction is finalized and unalterable This could reduce the risk of fraud and money laundering while ensuring a trustworthy financial ecosystem. Keep in mind that nothing is guaranteed.

Disadvantages of Central Bank Digital Currency

Financial Stability and Privacy Concerns

Introducing CBDC may impact the stability of traditional financial institutions, potentially leading to bank disintermediation. Additionally, concerns over user privacy and surveillance by central authorities have been raised. 

Technological Challenges

Implementing CBDC requires a robust technological infrastructure capable of handling high transaction volumes securely. Developing such systems may be complex and costly, especially for countries with limited resources.

Cybersecurity Risks

CBDCs are susceptible to cyberattacks, and any successful breach could have severe consequences on the entire financial system, affecting public trust.

Global Responses to Implementing a Central Bank Digital Currency

Considering some of the pros and cons, it is understanding that countries do not have a consistent and agreeable position on implementation of a CBDC. However, several countries have either launched or initiated pilot projects for CBDCs. For example, the People's Bank of China (PBOC) has been at the forefront, conducting pilot programs and launching its digital currency known as the Digital Currency Electronic Payment (DCEP). Additionally, Sweden has made movements through the Riksbank, which has issued e-krona as a response to the decline in the use of cash. Repeatedly mentioned is the Bahamas being noted as the pioneer in the Caribbean for introducing a CBDC. The Central Bank of The Bahamas introduced the Sand Dollar, becoming one of the first countries to officially launch a CBDC.

Conversely, many countries are refusing or heavily cautious about implementing a CBDC. One country that has expressed reservations or decided not to pursue the implementation of CBDC due to various concerns was Germany. The Deutsche Bundesbank has raised concerns about the potential negative consequences of CBDC on financial stability and consumer privacy, as such, as not moved forward with any further action. The United States, in my opinion, is not refusing to implement but rather is wisely investigating the thought of a CBDC. The U.S. Federal Reserve has been cautious about launching a CBDC and has not made any concrete plans yet. It could rapidly change as more information and brave jurisdictions test the waters and provide concrete feedback on successes and failures.