Accenture Banking Blog

The Growing Case for CBDC

As the world increasingly digitalises, industries around the globe are integrating new and innovative technologies and digital products to capitalise on the transformation. In Finance, one of the key developments is the possible introduction of central bank digital currencies (CBDCs) to offer more diversified formats of central bank money. CBDC is set to have profound economic and financial implications, reshaping existing payments processes locally while meeting changing user requirements globally.

Rather than just improving existing payment methods, the innovation with CBDC is in the adoption of tokens that add functionality, reach and utility to central bank money. This transformation is being seen as a complement to existing payment methods, as well as a core component in the modernisation of finance.

Given the position of central bank money as the principal medium for the implementation of monetary policy, the advent of CBDC is one of the most important and exciting developments in payments. Arriving amid new financial applications and integration challenges, it is expected to have wide-ranging implications for financial market participants, with most aspects of finance to be affected.

A Payment Medium for the General Public

Traditionally, central banks issue bank notes and coins to the general public and reserves to banks. Bank notes and coins—cash—are physical representations of central bank monetary liabilities, while reserves are book entries (or book money) and are electronic representations of the same. Together they are the preferred settlement medium for large value payments, as it does not incur any credit or counterparty risks.

Currently, to conduct payments with central bank money, the general public can only use cash. For large-value transactions, banks and other financial intermediaries serve on their behalf or on behalf of their clients in reserves. CBDC can serve as a complement to cash and reserves, acting as a digital representation of central bank money in token format, with properties akin to a digital bearer instrument.

A Secure Foundation

CBDC is fully fungible with bank notes, coins and reserves. For example, a one-dollar banknote is equivalent to an amount of one dollar in a reserve account and one dollar of CBDC. The difference in central bank money is the technology used to make these representations of central bank money, store value, and process payments.

The issuance of CBDC would be similar to the issuance of bank notes or the cash cycle. Banks and other financial intermediaries would exchange reserves for CBDC, then pass the digital currency on to non-banks and other end-users against deposit account balances. Issuance of CBDC would be a substitution of central bank liabilities only, and would not increase the central bank’s balance sheet.

Digital Currency for a Digital World

The digital currency would be held in electronic vaults by banks and in electronic wallets by end-users, both of which would meet the required holder identification and security protocols. The electronic wallets would exhibit different functionalities to enable transactions of different types, allowing banks and end-users to transact digitally in central bank money, irrespective of location and time.

The development of CBDC is about creating solutions to new and growing challenges, needs, and demands in payments. In international payments, CBDC can lead to more direct and flatter payments relations, without the need to rely on correspondent banks. This will allow for faster, more secure, and more transparent payment processes. In foreign exchange trading, CBDC trades can be conducted in real time while helping to collapse trading and settlement into a single transaction. CBDC can also serve as the payment leg for tokenised securities or delivery versus exchanging CBDC for a security token.

As in the case of a banknote, CBDC can serve as a settlement medium without the central bank being directly involved, thus offering a complete reorganisation and simplification of payment processing with significant efficiency gains expected. CBDC also allows for more decentralised payment transactions, diversified payment options, and payments at any time of day, thus providing a more flexible and secure payment system while maintaining needed security controls.

Growing Pains: Challenges in Adoption

The impact of CBDC on monetary policy and financial stability objectives has remained contested and rests in large part in the propensity of (mostly) non-banks to hold CBDC. The introduction of CBDC may lead to a substitution of bank deposits if non-banks perceive CBDC as superior to bank deposits. This would lead to a decline in the bank deposit base and may diminish banks’ capacity to fund credit operations. The direct impact on monetary policy remains unclear, but will also depend on whether CBDC alters money market conditions.

The features and design of CBDC and access to CBDC, in particular where access is granted to non-banks and non-resident entities, would likely determine actual monetary policy and financial stability. CBDC may also raise privacy concerns in retail transactions. Like all electronic payments, digital currencies cannot provide anonymity like cash, as all transactions are traceable. However, CBDC can provide privacy by allowing transactions to be conducted without the need for payer and payee to disclose their identities to one another.

CBDC is about the modernisation of central bank money and core financial market infrastructures. It endows central bank money with new functionality and utility—and, amid the critical role of central bank money, is set to be transformative for the financial system as a whole.

Central bank digital currency is the next evolution of central bank money. It will ensure central banks can continue to play a key role amid the increasing digitalisation in payments, and will itself become a catalyst for digitalisation in payments.

In our next post, we’ll examine what CBDC means for both banks and non-banks. To read more, please visit The (R)evolution of money II Blockchain empowered CBDC.

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