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CBDC Explained: The Future of Digital Currencies
Understanding Central Bank Digital Currencies (CBDCs): The Evolution of Money and Finance
Published November 12, 2023.
A central bank digital currency, or CBDC, digitizes a nation's currency, such as a digital dollar, euro, or pound.
While this concept has been discussed for years, the proposal has accelerated over the last 18 months as countries attempt to catch up with China. More than 100 countries are researching, testing, or installing a digital version of their money.
CBDCs are significant developments in money because they will play a role in monetary policy, technological advancements, and payment efficacy. On the other hand, even proponents say that there are risks to CBDCs, particularly on the privacy front. That said, digital money can further advance the commercial banking system and worldwide commerce by improving retail payments or expanding cross-border settlements.
But while it might seem like a complex system for governments and large financial institutions, many are unsure how it would function for consumers. Central banks explain that CBDCs would operate similarly to how shoppers depend on digital wallets and mobile payment systems. The one important difference is that the money is directly issued and regulated by the central bank, whether the Federal Reserve or the European Central Bank (ECB).
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The 2 Types of CBDCs
| | Wholesale CBDCs | Retail CBDCs |
|---|---|---|
| Objectives | The primary purpose behind a wholesale CBDC is to bolster speed, enhance security, and improve the efficiency of financial transactions between institutions. | Supporters of retail CBDCs present that this evolution in payments and currency can advance financial inclusion by offering individuals direct access to central bank money, enabling faster and more affordable retail payments, and reducing cash usage. |
| Users | Wholesale CBDCs are explicitly designed for financial institutions and market participants. They will utilize large-value transactions, interbank settlements, and financial market infrastructure. | Unlike wholesale CBDCs, the retail version is focused mainly on consumers. Retail CBDCs are created for day-to-day transactions comparable to physical cash or existing digital payment tools to increase payment efficiency and support financial inclusion for businesses and individuals. |
| Accessibility | This category of CBDCs is catered specifically to financial institutions, such as commercial banks and financial intermediaries, and central banks to conduct large-scale transactions. | Retail CBDCs are generally accessible to the general public, whether individuals or businesses, with multi-faceted purposes. The transaction sizes are much smaller than the wholesale CBDC since they will be used for bill payments, daily purchases, and other retail efforts. |
| Monetary Policy | Believe it or not, a digital dollar or loonie can play a tremendous role in monetary policy. Since wholesale CBDCs can influence the operations and efficacy of financial markets and institutions, central banks | Retail CBDCs allow central banks to possess greater and more direct control over the economy, from the national money supply to consumer spending patterns and overall economic activity. |
How to Invest in CBDCs
Technically, you cannot invest in central bank digital currencies since they are digital representations of countries' money. You can tap into foreign exchange markets if you think governments might maintain a competitive advantage for their currencies by adopting CBDC technology. Still, there is no direct way to invest in CBDCs.
That said, there are ways that you can indirectly invest in CBDCs by trading companies that offer services and technologies related to central bank digital currencies, such as blockchain technology services firms, FinTech (financial technology) businesses, and digital payment platforms.
The best way to participate in the coming CBDC economy is to educate yourself about the latest developments and public policy pursuits. This way, you will not be blindsided by these emerging technologies and ensure you can make informed money-related decisions.
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The Future of CBDCs
What Proponents Think
Argue that central bank digital currencies are needed since the financial infrastructure in advanced economies is sub-par. Payments cannot be completed at night, money cannot be transferred on weekends, and cross-border transactions are expensive. CBDCs, be it wholesale or retail, can improve the experience.
What Critics Think
Warn that this is a dangerous tool that can invade consumers' privacy and function as a surveillance apparatus for governments and other authorities if consumers do not comply with state mandates.
Should You Invest in CBDCs?
Once again, you cannot invest directly in central bank digital currencies because they are digital versions of money. Will consumers utilize CBDCs when governments institute them? So far, countries that have employed digital currencies have seen little adoption, such as China and Nigeria. For nations that have started exploring CBDCs, there is already widespread reluctance. Will this change in the coming years? Like anything else in the financial markets and global economy, time will tell!
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