Central Bank Digital Currency (2024)

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Tech Champion: Stefano Leucci

Central Bank Digital Currency (CBDC) is a new form of money that exists only in digital form. Instead of printing money, the central bank issues widely accessible digital coins so that digital transactions and transfers become simple.

Efforts towards CBDC grow all over the world for many reasons. First, the COVID-19 crisis induced a shift in payment habits towards digital, contactless payments and e-commerce due to a now refuted danger of banknotes being way of transmitting infection, which has accelerated the decline of cash use. Second, cryptocurrencies developed by private organisations or informal communities (e.g. Bitcoin) have seen significant developments and value gain. As a response, 87 countries (representing over 90 percent of global GDP) are now exploring central bank digital currencies, while 9 of them have fully launched a state-owned digital currency.

CBDC could be developed in a number of ways. In a centralised approach, transactions are recorded in ledgers managed by central banks that also provide user-facing services. In a decentralised approach, a central bank sets rules and requirements for the settlement of CBDC transactions that are then recorded by users and/or financial intermediaries.

The impact of CBDC depends also on the chosen implementation. Conventional money requires many intermediaries in the payment chain, resulting in less efficient and secure payment experiences, as we showed in our recent TechDispatch. CBDC could find solutions to these issues, developing a more efficient, fast, secure and sovereign form of payment process.

The European Central Bank, after exploring possible design scenarios for launching a Digital Euro and consulting with stakeholders, decided to launch a CBDC project with an investigation phase that will last from October 2021 to October 2023.

Positive foreseen impacts on data protection:

Privacy is one of the most important design feature: the consultation launched by the ECB in October 2020 revealed that privacy is considered as the most important feature of a digital euro by both citizens and professionals; this was also confirmed by different focus groups. Design decisions are still open, and this situation results in a wide range of opportunities for configuring the product with an effective data protection by design approach.
More control over personal data and security: assuming that the development of CBDC will follow a strict data-protection-by-design and by-default approach, a CBDC could increase data protection and security in digital payments and provide payers more control over their personal data.
Enhanced possibility to have anonymity in the payment process: privacy-enhancing technologies could be used to enhance the way anonymity is wired within the entire payment process while allowing the auditing only in pre-determined lawful cases, such as preventing money laundering, counter terrorism financing and tax evasion.

Negative foreseen impacts on data protection:

Concentration of data in the hands of central banks could lead to increased privacy risks for citizens: if payment data of all citizens were concentrated in the databases of a central bank, it would generate incentives for cyberattacks and a high systemic risk of individual or generalised surveillance in case of data breaches or, more in general, of unlawful access.
Wrong design choices might worsen data protection issues in digital payments: payment data already reveals very sensitive aspects of a person. Wrong design choices in the underlying technological infrastructure might exacerbate the privacy and data protection issues that already exists in the digital payment landscape. For example, transactional data could be unlawfully used for credit evaluation and cross-selling initiatives.
Lack of security might turn into severe lack of trust from users: security concerns in the CBDC infrastructure, whose security requirements and expectations are high, may turn into a significant loss of trust from users.

Our three picks of suggested readings:

European Central Bank, Report on a digital euro, 2020
Raskin et.al., Digital currencies, decentralized ledgers, and the future of central banking, National Bureau of Economic Research, 2016
Institute and Faculty of Actuaries, Understanding Central Bank Digital Currencies (CBDC), March 2019

EDPS related works:

TechDispatch #2/2021, Card-based payments, December 2021 - https://edps.europa.eu/data-protection/our-work/publications/techdispatch/techdispatch-22021-card-based-payments_en
TechSonar Report 2021-2022, December 2021 - https://edps.europa.eu/system/files/2021-12/techsonar_2021-2022_report_en.pdf
EDPB letter to the European institutions on the privacy and data protection aspects of a possible digital euro, June 2021 - https://edpb.europa.eu/system/files/2021-07/edpb_letter_out_2021_0112-digitaleuro-toep_en.pdf

FAQs

Central Bank Digital Currency? ›

Central Bank Digital Currency (CBDC) is a new form of money that exists only in digital form. Instead of printing money, the central bank issues widely accessible digital coins so that digital transactions and transfers become simple. Efforts towards CBDC grow all over the world for many reasons.

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Is the central bank going to digital currency? ›

While the Federal Reserve has made no decisions on whether to pursue or implement a central bank digital currency, or CBDC, we have been exploring the potential benefits and risks of CBDCs from a variety of angles, including through technological research and experimentation.

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Will digital currency replace cash? ›

This type of money is known as a central bank digital currency (CBDC). It would not replace cash.

Which country has a central bank digital currency? ›

The Atlantic Council's Josh Lipsky and Ananya Kumar said one of the most noteable developments this year has been the sizable increase in the Bahamas, Jamaica and Nigeria's CBDCs, the only three countries that have already launched them.

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Will the US launch a digital dollar? ›

Is the US Going to Digital Dollar? As of June 2024, the US Federal Reserve has not decided to transition to a CBDC or supplement its existing monetary system with one. It is researching the effects a CBDC would have on the dollar, the US, and the global economy.

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What will replace the dollar? ›

Instead of replacing US dollars with the currencies of the world's largest economies, like China's renminbi and the EU's euro, central bankers are holding more currencies from smaller economies with a strong credit rating. These include the Australian dollar, the Canadian dollar, and the South Korean won.

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Why will cash never go away in the US? ›

Security Issues. Some consumers choose to pay for purchases with cash because of security concerns. Every time another big company suffers a breach that compromises payment card information, consumers worry about how that impacts them.

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Which banks have central bank digital currency? ›

Six central banks have launched a CBDC: the Central Bank of The Bahamas (Sand Dollar), the Eastern Caribbean Central Bank (DCash), the Central Bank of Nigeria (e-Naira), the Bank of Jamaica (JamDex), People's Bank of China (Digital renminbi), the Reserve Bank of India (Digital Rupee), and Bank of Russia (Digital Ruble) ...

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What is the difference between central bank and digital currency? ›

The main difference between a central bank digital currency and a cryptocurrency is that a CBDC is – as its name implies – issued by a central bank. This means it is also a “direct liability” of the central bank, as the World Economic Forum's Digital Currency Governance Consortium White Paper Series points out.

Does China have a central bank digital currency? ›

Digital renminbi (Chinese: 数字人民币; also abbreviated as digital RMB and e-CNY), or Digital Currency Electronic Payment (DCEP, Chinese: 数字货币电子支付; pinyin: Shùzì huòbì diànzǐ zhīfù), is a central bank digital currency issued by China's central bank, the People's Bank of China.

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What happens if the U.S. dollar goes digital? ›

Critics claim the digital dollar, or any form of digital currency, would have major privacy and security concerns and could give the government unprecedented access to Americans' financial data. Digital currencies may also be more susceptible to cyberattacks or hacking than traditional payment methods.

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Will cash become obsolete? ›

From paper to polymer banknotes

We have been issuing banknotes for over 300 years and make sure the banknotes we all use are of high quality. While the future demand for cash is uncertain, it is unlikely that cash will die out any time soon.

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Is digital currency here to stay? ›

Digital currency payments, however, improve financial inclusion. They can expand access, ownership, and usage of a broad range of financial services. And they're here to stay.

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How long before digital currency? ›

If the U.S. does move ahead, this new form of currency probably won't be put into wider use for several years, Chakravorti says. The very limited 12-week pilot involving the Federal Reserve Bank of New York will be rolled out soon using simulated digital tokens and data.

What are the risks of central bank digital currency? ›

A key risk are the potential gaps in central banks' internal capabilities and skills. While many of the CBDC-related activities could in principle be outsourced, doing so requires adequate capacity to select and supervise vendors.