What is a CBDC?

 

CBDC (Central Bank Digital Currency): Country-Specific Status and Pros & Cons

What is a CBDC?

CBDC stands for Central Bank Digital Currency, which is a digital form of legal tender issued by a central bank. Unlike existing physical currency, it exists entirely in digital form, and its value is guaranteed by the central bank's credibility.

CBDC Status by Major Countries

China (Digital Yuan, e-CNY)

• Status: China is the most proactive country in pushing for CBDC, already moving beyond the pilot phase into actual use.
• Features: As of July 2024, it has surpassed 180 million individual wallets and accumulated over USD 1.02 trillion (7.3 trillion yuan) in transactions.
• Expansion: Some local governments even pay civil servant salaries in digital yuan.
• Internationalization: Since May 2024, Hong Kong residents can open digital yuan wallets and use them in pilot areas within mainland China without a mainland bank account.
• Challenges: Its widespread adoption faces difficulties due to Alipay and WeChat Pay dominating over 90% of the mobile payment market.

United States

• Status: The Trump administration halted CBDC initiatives, but research is still ongoing.
• Features: Approaches with caution due to concerns about privacy and financial freedom.
• Participation: The US is involved in the 'Project Agorá' aimed at improving the efficiency of international payments.

Europe (Digital Euro)

• Status: The European Central Bank (ECB) is in the preparation phase for introducing the digital euro.
• Goal: To enhance the efficiency of the digital payment system and strengthen the international standing of the euro.

Japan

• Status: Developing a digital yen and conducting pilot projects.
• Features: Pursuing digital transformation tailored to Japanese society, where cash usage is still high.

South Korea

• Status: The Bank of Korea is conducting CBDC simulations.
• Participation: Involved in 'Project Agorá' for improving international payment efficiency.
• Features: Four major commercial banks, along with financial firms like Woori Fund Services and Mirae Asset Fund Services, have announced their entry into the digital asset custody business, expanding their service areas.

Advantages of CBDC

1. Increased Financial Inclusion

• Allows people without bank accounts to access digital financial services.
• Expands economic participation opportunities for the financially underserved.

2. Enhanced Transaction Efficiency

• Improves the efficiency of payment systems.
• Enables faster and cheaper cross-border money transfers compared to traditional banking systems.

3. Strengthened Financial Transparency

• Potential to bring the underground economy into the light.
• Facilitates easier tracking of financial illegal activities.
• Effective in preventing illegal financial activities like tax evasion and money laundering.

4. Improved Monetary Policy Efficiency

• Enhances the central bank's effectiveness in implementing monetary policy.
• Allows for swift policy responses during economic crises.

Disadvantages of CBDC

1. Privacy Concerns

• Unlike physical cash, every transaction is recorded in government systems.
• Potential for complete exposure of individuals' spending habits.
• Even if anonymity is promised, the design can always allow for traceability.

2. Risk of Government Control and Surveillance

• Concerns that the government could misuse it as a tool for surveillance and control.
• Potential infringement on individuals' financial freedom.

3. Cyber Security Risks

• Centralized systems can become targets for hacking.
• A large-scale cyberattack could expose the entire financial system to risk.

4. Conflict with Existing Financial Systems

• Potential for reduced roles of commercial banks.
• Market disruption due to changes in financial intermediation functions.

CBDC Operating Models

Most countries are considering indirect operating models, where commercial banks, financial institutions, and fintech companies act as intermediaries, rather than the central bank operating it entirely. This approach aims to reduce the central bank's burden and efficiently implement widespread system improvements.

CBDC Outlook for 2025

CBDC investments are expected to increase tenfold in 2025 compared to 2024. The institutionalization of CBDCs for payment settlements will be a crucial turning point. As regulatory frameworks are established in different countries, institutional investor participation is also expected to grow.

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Thus, while CBDCs have the potential to enhance the efficiency and transparency of financial systems, they also come with concerns regarding privacy and  government control. Each country needs to consider these pros and cons and operate it in a way that suits its own circumstances.

"Have you gained a better understanding of CBDC with the information provided here?"