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Bank of America analyst Alkesh Shah wrote in a note on Tuesday that Central Bank Digital Currency (CBDC) “doesn’t change the definition of money, but will likely change the way and when value is delivered in the next 15 years”.
Note CBDC is a digital currency that is issued and backed by a central bank (think Federal Reserve, European Central Bank, etc) rather than a commercial bank. In essence, they are a digital form of a country’s fiat currency, such as the US dollar (DXY) and euros, designed to increase efficiency and reduce costs through the use of blockchain technology.
“CBDC has the potential to revolutionize global financial systems and is possibly the most important technological advancement in the history of money,” asserts Shah. As of now, 114 central banks are exploring CBDCs, up from 35 in May 2020, he added.
Meanwhile, financial systems built on centralized infrastructure require third-party intermediaries, which “limit efficiency, interoperability, innovation, and functionality, such as conditional payment.” However, distributed ledgers built on decentralized infrastructure “eliminate fragmentation and the need for intermediaries, increase efficiency, interoperability, and innovation, and extend functionality by how to replace API with smart contract.”
There are risks associated with CBDCs, Shah warns, depending on their design and release. He expects central banks in developed economies to start focusing on payment efficiency, while banks in developing economies will focus initially on financial inclusion.
According to the note, one of the major risks is that CBDCs could foster competition with bank deposits, potentially leading to a loss of monetary sovereignty and inequality among countries across the globe.
In November 2022, the central bank of Japan is expected to conduct a trial of CBDC with three banking giants. Check out SA contributor Richard Lehman’s clarification on CBDC.
