You might have come across the term ‘central bank digital currency’ (CBDC) over the last few years. For some people, CBDCs represent the next step of digital money. For other people, CBDCs are part of a nefarious plot by bankers and international elites to take control of your wallet - and the world.

Whether you see CBDCs as a technological innovation or a dystopian scheme, CBDCs are here to stay. Central banks around the world are exploring whether they’re a good idea and, if so, how to implement them. The most ambitious one so far is the Digital Euro.

So, what is the Digital Euro?

The European Union defines the Digital Euro as a digital form of cash, issued by the central bank and available to everyone in the euro area.

The Digital Euro would provide citizens with an alternative to cash that does not rely on banks, credit card companies, or other financial intermediaries like Venmo. There will most likely be an app that would allow people to pay using their Digital Euro account across the E.U.

The European Union says that digital euros will complement cash, not replace it. It also said that people will be able to convert their digital Euros into bank notes and vice versa.

The EU and the European Central Bank began exploring the idea of a digital euro two years ago. The initial two-year investigation phase concluded and the preparation phase began on November 1, 2023. The two-year preparation phase will allow European Central Bank officials and E.U. lawmakers in the European Parliament to determine whether they want to proceed with actually implementing a digital Euro.

Central bank digital currencies (CBDCs)

The Federal Reserve defines CBDCs as "a digital form of central bank money that is widely available to the general public.

"Central bank money" refers to money that is a liability of the central bank. In the United States, there are currently two types of central bank money: physical currency issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve.

While Americans have long held money predominantly in digital form—for example in bank accounts, payment apps or through online transactions—a CBDC would differ from existing digital money available to the general public because a CBDC would be a liability of the Federal Reserve, not of a commercial bank.”

What are the possible benefits of a CBDC? According to the Fed, they could:

• “Provide households and businesses a convenient, electronic form of central bank money, with the safety and liquidity that would entail;

• give entrepreneurs a platform on which to create new financial products and services;

• support faster and cheaper payments (including cross-border payments);

• expand consumer access to the financial system.”

There are different ways that a CBDC could involve commercial banks, payment services, and other financial intermediaries. See below for some illustrations of how indirect, direct, and hybrid CBDCs could work:

What other countries have created CBDCs?

The vast majority of the world’s countries (that have central banks) are exploring CBDCs. 130 countries representing 98% of the global economy are looking into CBDCs, including every G20 country except for Argentina.

The Federal Reserve and the Bank of England both have exploratory projects to determine whether a CBDC would be feasible and desirable.

Plus:

• Ecuador experimented with a CBDC between 2014 and 2018

• In 2020, the Bahamas launched the "Sand Dollar" as the digital version of the Bahamian dollar

• The Eastern Caribbean Central Bank (which includes Antigua and Barbuda, Grenada, St. Kitts and Nevis, and St. Lucia) launched "DCash" in 2021. It was later expanded to St. Vincent and the Grenadines, Dominica, Montserrat and Anguilla

• Indonesia, Nigeria, and Turkey are planning to develop their own CBDCs

• India and Brazil, two of the most populous countries in the world, will roll out CBDCs next year
  

  

  Mastercard and Island Pay released a card that can use the Bahamian Sand Dollar in 2021

Who is against CBDCs? And why?

Not everyone is happy with the idea of CBDCs. Some cryptocurrency fans are opposed to CBDCs because widespread adoption of CBDCs would likely make cryptocurrencies less valuable and useful.

In April, two researchers at the libertarian Cato Institute published a report arguing that the U.S. Federal Reserve should not create a CBDC.

They claim that a Fed-backed CBDC would not provide any advantages over current digital money systems like Venmo or Zelle. They also argue that CBDCs would expand financial surveillance of Americans while creating the possibility that the Federal Reserve or federal government could block people from participating in the financial system.

Read More:

If you want to learn more about CBDCs, I recommend this short explainer from McKinsey & Company. It goes into detail on China’s success with its digital renminbi program, which should be interesting for the finance and technology geeks reading this newsletter. 📚

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Yours,
Dan#