What is CBDC and why are countries considering it now?

Right now multiple countries around the world are considering establishing a central bank digital currency (CBDC). This increased interest may have been spurred on by the decline in cash use during the pandemic, as well as the growing popularity of digital payments.

Cash got a bad name in 2020

Early negative messaging around Covid-19 and cash use could be linked to a significant fall in cash use worldwide last year. In its 2020 Global Payments Report , McKinsey predicted a 4% to 5% decline in cash payments by the end of the year. That figure is four to five times the annual decrease in cash payments, observed by McKinsey in previous reports.

Fear around cash spreading the virus began when the World Health Organisation (WHO) said it was misrepresented in a British newspaper. WHO spokesperson Fadela Chaib told financial news website MarketWatch in March 2020 that the organisation "did not say that cash was transmitting Coronavirus." 

Seeking to set the record straight, Chaib said WHO simply advised that, "customers should wash their hands after touching banknotes, because infectious Covid-19 may cling to the surface for a number of days." This follows the advice WHO have been giving since the beginning of the pandemic that people should wash their hands thoroughly after touching any surfaces out and about. 

Alas, despite WHO trying to change the narrative, many shops and businesses continue to not accept cash.

What is CBDC, exactly?

CBDC, which stands for central bank digital currency, is a form of digital currency issued by a country’s central bank. Although electronic payments do exist, right now cash is the main form of money issued by central banks around the world. 

In Australia the RBA (Reserve Bank of Australia) is responsible for issuing Australian banknotes and formulating monetary policy. If a CBDC were introduced in Australia, it would be legal tender issued and controlled by the RBA. Importantly, it would be a centralised currency, unlike cryptocurrency which is mostly decentralised.

CBDC and electronic payments

You may be wondering 'what’s the difference between CBDC and electronic payments'? Well, while electronic money can be turned into physical money, CBDC would only ever be digital.

In a speech given on CBDC in late 2020, RBA’s Head of Payments Policy, Tony Richards explains further what electronic money is. He said, "Most money in Australia already exists in digital form. The bulk of this digital money is in the form of deposits recorded in electronic ledgers at commercial banks (and other authorised deposit-taking institutions or ADIs)."

Let’s look at an example to explain the difference:

Say you buy $20 worth of groceries. One way to pay would be by tapping your debit card at the checkout. In this instance your bank would electronically transfer funds from its computer system to the grocery store bank’s computer system. In a sense, electronic money could be described as a promissory note for cash. Its value is backed by fiat currency. That is government issued money, not pegged to the value of an actual physical commodity, like gold or silver.

By contrast, CBDC would be completely digital. This means that $20 in digital currency would not equate to $20 in cash. Unlike electronic money it would be an actual currency, not simply an amount entered into a bank’s ledger.

Countries considering CBDC

In late 2020, The Bahamas became the first country to launch a central bank digital currency. The ‘Sand Dollar ’ is issued by the Central Bank of The Bahamas and distributed through authorised financial institutions (AFIs).

Some other countries considering establishing a CBDC include Cambodia, Canada, China, Ghana, Hong Kong, South Africa, Singapore, the United Kingdom and the Ukraine. The People’s Bank of China released a whitepaper on its progress with developing the digital yuan in July 2021. Just a few months earlier in March 2021, the Bank of England produced its own discussion paper on CBDC and the opportunities and challenges it may pose. 

Will Australia introduce CBDC?

In his speech mentioned earlier, Tony Richards said that the RBA does not currently see a strong case for the introduction of CBDC in Australia. 

Richards added that despite this, the RBA will keep an open mind to creating a CBDC. He said, "If some jurisdictions do move towards full implementations of CBDC, there will be many central banks like us who will be closely watching their experience."

So it looks like Australia won’t be getting its very own CBDC just yet. However, we will continue to keep readers up to date on the latest developments in the digital payments space. Speaking of which, if you want to check out more articles like this, head to Mozo’s fintech articles hub.