Central Bank Digital Currency (CBDC) is a digital form of legal tender issued by a central bank. Unlike traditional paper notes and coins, CBDC exists in electronic form and is directly managed and issued by a nation's central bank. It represents a digital version of currency that can be used as legal tender in economic activities. CBDC is not only a digital embodiment of traditional legal currency but also signifies the potential convergence of the traditional financial system with cryptocurrency technology. This article will explore the concept of CBDC, its differences and connections with cryptocurrencies, the current global developments, and the potential economic and social impacts it may bring in the future.
Historical Development of CBDC
The history of Central Bank Digital Currency (CBDC) is relatively recent, but its concept and development are products of modern economic and financial technology transformations. The evolution of CBDC can be traced back to several important trends in the global financial system in recent years, such as the rise of digital payments, the proliferation of cryptocurrencies, and the central banks' need to modernize monetary policy tools. While some may consider CBDC a new concept, it has actually existed for about 30 years. In 1993, the Bank of Finland introduced the Avant smart card system, which was an electronic form of currency. Although the system was eventually phased out in the early 2000s, it can be considered the world's first central bank digital currency.
Early Background (Pre-2008)
Before the 2008 financial crisis, the concept of digital currency primarily existed in the form of electronic money within commercial banks and payment systems, such as credit card payments and interbank transfer systems. Although electronic money existed at the time, it was mainly managed by commercial banks or payment companies, with central banks not yet directly involved in managing digital forms of legal currency.
The Rise of Bitcoin and Cryptocurrencies (2009)
In 2009, the emergence of Bitcoin marked the rise of cryptocurrency and blockchain technology. Bitcoin and other cryptocurrencies showcased a decentralized monetary system, supported by blockchain technology, and independent of central banks. However, the volatility, anonymity, and lack of regulation in cryptocurrencies also raised concerns among global financial regulators. This prompted central banks around the world to consider how to respond to this digital financial revolution. On the one hand, they sought to regulate the financial risks and challenges posed by cryptocurrencies, and on the other, they began researching how to use digital technology to optimize existing monetary systems.
Initial Exploration (Around 2014)
With the maturation of blockchain technology, central banks began to research digital currencies. In 2014, the People’s Bank of China (PBoC) announced it was beginning to explore the feasibility of issuing a legal digital currency. That same year, the Bank of England also explored the concept of CBDC, highlighting its potential impact on the economy.
Global Research and Development (2016–2020)
In 2016, the Swedish central bank (Riksbank) introduced the concept of the e-Krona to address the decline in cash usage in the country, making Sweden one of the first countries to explore CBDC. Simultaneously, the Bank for International Settlements (BIS) began urging central banks globally to intensify their research on digital currencies. Central banks in countries and economic regions such as China, Canada, the European Union, Japan, and the United States launched research projects to explore the implementation paths for digital currencies. In 2017, China accelerated its research and development of the digital renminbi (DCEP, later known as e-CNY), becoming one of the first countries globally to start large-scale CBDC development.
Pilot Testing and Development (2020 and Beyond)
The year 2020 marked an important milestone in CBDC development. With the global decline in cash usage and the surge in demand for contactless payments driven by the COVID-19 pandemic, more countries accelerated their CBDC development.
China's Digital CNY
In 2020, China officially began pilot tests of its digital renminbi (e-CNY), conducting large-scale tests in multiple cities, covering various scenarios such as retail payments and corporate transactions. This project has drawn significant attention from the global financial community and is considered one of the most advanced CBDC initiatives globally.
The European Union and the United States
The European Central Bank (ECB) launched a research project for the digital euro. In 2021, the ECB announced a two-year exploration phase for the digital euro. In the United States, the Federal Reserve has gradually accelerated its research on the digital dollar, although progress has been more cautious.
Current Developments (2023 and Beyond)
Today, CBDC research and pilot testing have become a key agenda item for central banks worldwide. International institutions like the International Monetary Fund (IMF) and the Bank for International Settlements (BIS) are also coordinating research and cooperation between central banks.
China: In 2022, the digital renminbi saw widespread use during the Beijing Winter Olympics and continues to be promoted nationwide.
The European Union: The development of the digital euro is ongoing and may be officially launched in the coming years.
Other countries: Nations such as the Bahamas with its Sand Dollar and Nigeria with its eNaira have already launched CBDCs for domestic use.
Differences Between CBDC and Cryptocurrencies
While both CBDCs and cryptocurrencies (such as Bitcoin and Ethereum) rely on digital technology, they have significant differences.
Issuer: Cryptocurrencies are typically generated by decentralized networks without a single issuing authority, whereas CBDCs are issued by central banks and backed by national governments.
Decentralization vs. Centralization: Most cryptocurrencies are decentralized and not controlled by any single entity, while CBDCs are centralized and directly controlled and regulated by central banks.
Volatility: Cryptocurrencies are highly volatile due to market demand, whereas CBDCs are tied to national currencies, making their value relatively stable.
Privacy and Regulation: Many cryptocurrencies offer a degree of anonymity, whereas CBDCs operate within the framework of central banks and are generally more traceable.
Despite these differences, CBDCs and cryptocurrencies share many technological similarities, particularly in the application of blockchain or distributed ledger technology. As countries move forward with CBDC development, more trends of convergence are emerging.
Potential Impact of CBDC on Today’s Financial System
Enhancing Payment System Efficiency: CBDCs can significantly improve the speed and efficiency of payment systems, especially in cross-border payments. Traditional cross-border payment processes are complex and expensive, while CBDC-based payments can reduce intermediaries and lower transaction costs. Compared to traditional SWIFT international transfers, CBDCs can significantly improve efficiency and reduce costs.
Promoting Financial Inclusion: In many underdeveloped regions, CBDCs have the potential to provide convenient digital payment services for unbanked populations, promoting financial inclusion.
Improving Monetary Policy Transmission: Through CBDCs, central banks can more directly and quickly influence the flow of money in the economy, potentially enabling more precise control over monetary policy.
Challenging the Role of Commercial Banks: The introduction of CBDCs could threaten the traditional intermediary role of commercial banks, particularly in terms of deposits and payments. If consumers can directly hold digital currency issued by central banks, it may reduce their reliance on commercial banks.
Although CBDC has a short history, its development has been rapid. In the coming years, CBDCs may become an integral part of the global financial system, with central banks continuing to explore their potential to promote financial inclusion, enhance payment system efficiency, and strengthen monetary policy control. As technology matures, more countries may launch their own digital currencies, reshaping the global financial order.
