CBDCs: additional means of payment, no store of value


Central Bank Digital Currencies (CBDCs) are gaining interest even though they are in their infancy, and it is not clear how fast they will develop. Central banks' interest in the subject has not waned - no less than 100 central banks are working on the subject, but many questions remain unanswered.

Since 2020, more and more central banks have signalled their interest in digital currencies, with very different approaches from one country to the next. In China (with the e-Yuan in a large-scale pilot phase), in Uruguay (with the e-Pesos) or in the Bahamas (which officially launched the Sand Dollar), as well as in Nigeria (with the eNaira), these currencies are intended for "retail" use: they aim to promote daily exchanges, while giving authorities greater control over transactions.

However, much of the research and experiments underway relate more to the uses of these digital currencies in the context of wholesale exchanges, that is, for high value-added payments reserved for specialised financial players (banks, financial institutions, insurers, etc.). 

This is currently the dominant approach in Europe, with the experiments involving Societe Generale via its subsidiary Forge, for example. In the spring of 2021, SG Forge participated in the issuance of digital bonds on a blockchain on behalf of the European Investment Bank (EIB). In a partnership with Banque de France, the settlement of securities by subscribers at the EIB was represented by the CBDC issued on the blockchain.

Why are central banks interested in CBDCs?

Depending on the country and the level of maturity of each economy, CBDCs serve a variety of interests. While a power like China has an opportunity to assert its sovereignty, to impose an alternative to the dollar and to heighten control over transactions on its soil, countries with low banking penetration rates hope to find a way to promote financial inclusion for their people. 

Central banks in the most developed economies mainly hope to improve the efficiency and reliability of wholesale payments, while demonstrating their capacity for innovation at a time when decentralised finance is on the rise.

There is therefore no universal CBDC model. Depending on how they are designed and deployed, CBDCs can therefore provide answers to the specific problems of each region: developing cross-border trade, ensuring greater traceability of domestic transactions, encouraging innovation, accelerating payments, improving the resilience of the financial system, etc. But above all, they are a public response to the private initiatives of tech giants and the reaffirmation of the States in their regalian and general interest role.

More questions than answers, for now

In Europe, however, the appeal of CBDCs may be limited: in wholesale, existing infrastructures are already working well and continue to improve, while in retail, the banking penetration rate is already quite high for individuals. Following the investigation phase on the creation of a digital retail euro, announced in July 2021, the ECB is announcing a digital euro prototype for 2023 in order to offer the inhabitants of the euro zone a free, secure and universally accepted means of payment, the contours of which have yet to be defined.

One of the risks is hyper-fragmentation of the market, where different payment systems and different types of cryptocoins (CBDCs, cryptocurrencies, stable coins, etc.) co-exist with little or no interoperability between them. But it is consistent for the ECB to look at the principles of decentralised finance in order to be able to propose "hybrid" alternatives that will benefit from technological advances while capitalising on current infrastructure, as the latter have already proven their efficiency and resilience.

It will also be necessary to provide answers to technical questions. The technological architecture chosen (will it be centralised, or partially or totally decentralised?) poses major challenges in terms of governance, control and transparency. These technological choices will also have crucial implications in terms of resilience and ecological sustainability. The ongoing research will also have to take into account the subject of financial costs, the sharing of value between the various players in the chain and the respect of personal data. Finally, the cultural challenge should not be underestimated, and central banks will have to make an effort to communicate with the public. This is the price to pay for trust.

Whatever happens, retail CBDCs, both in Europe and around the world, will hardly be able to become a new store of value without jeopardising the current delicate financial balances—it is likely and even desirable that they will simply become yet another means of payment. Furthermore, with few exceptions, these currencies will be of more interest in wholesale and cross-border trading than in daily transactions. The matter of interoperability between them is therefore fundamental.
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