Central Bank Digital Currencies

Unsurprisingly, the pandemic has driven many of us to rely on digital forms of payments over  cash. In fact, 25% of US consumers use less cash now than before March 2020. Additionally, government policies around the world are now pushing towards digital currency adoption to foment contactless payments. For example, China’s central bank branch is looking to eliminate banknotes from certain sectors. But without cash payments, what will be the alternative for central banks?

Enter – Central Bank Digital Currencies (CBDCs). 

The Rise of CBDCs

A CBDC is the sovereign equivalent of private cryptocurrencies and digital assets, issued and controlled by a country’s Central Bank and used by people and businesses for retail payments. The overall mission of CBDCs is simple: to move money like information. To stay on top of today’s constantly evolving digital market, central banks must actively review the pros and cons of offering a private digital currency in their region. In fact, 86% of central banks¹ are already investigating potential CBDC adoption, with over half already progressing from research to pilot projects. 

China has started trials of e-yuan currency, with a proposed launch date of February 2022. European officials want to launch a digital euro by 2025. The Bahamas has put its version “the sand dollar” into circulation². The United States announced it is exploring a U.S. digital dollar³, a tokenized version of the dollar we know. 

This form of private cryptocurrencies is playing a critical role in the new, global financial infrastructure that blockchain technologies underpin. 

Some of the key benefits of CBDCs:

• Enhance existing payment system by increasing the speed and efficiency of payments while reducing costs and failure rates.

• Promote financial inclusion to increase access to financial services for under and unbanked populations. 

• Encourage greater competition by reducing barriers to entry and boosting access to global markets through interoperability.

• Foster innovation with advanced digital features like smart contracts and programmable money. 

• Maintain control by ensuring Central Banks retain sovereignty over monetary policy and not allow alternative currencies to dominate the market. 

Interoperability: The Key to Success

By 2024, at least half of the world’s population is expected to use digital wallets for transactions that will be valued at more than $9 trillion annually. 

With this in mind, every CBDC will need to have some level of interoperability built in. Interoperability is the ability to share and access information across multiple networks without the need for an intermediary, thus reducing costs and saving time for parties involved. 

A BIS survey¹ found that improving the efficiency of payments was the key motivation for adopting CBDCs. And rightfully so – without seamless domestic and cross-border functionality, most CBDCs will significantly underachieve their potential. 

In today’s globalized world, consumers and businesses will inevitably have a need to transact with foreign suppliers and vendors. CBDCs that are interoperable with each other will give those countries a competitive advantage. Each government can create its own CBDC rules and policies that best suit its domestic market. However, CBDCs should also be united by collective protocols that will enable them to cooperate seamlessly with other CBDCs and digital currencies for simplified cross-border payments.  

The Ripple Impact

In March 2021, we announced our CBDC solution that can provide Central Banks a secure, controlled and flexible means of issuing and managing digital currencies. The CBDC Private Ledger is based on the same blockchain technology that powers the XRP Ledger (XRPL), and it also leverages RippleNet technologies and the Interledger Protocol (ILP), bringing the best technologies together to support central banks’ needs.

Ripple is currently engaging with central banks to discuss how our Private Ledger can help them achieve their CBDC goals. 

We’re looking forward to the next evolution of money.
For more details on CBDCs, check out our CBDCs and Interoperability webinar. Get in touch with [email protected] to find out how your organization can get involved.