With the rapid development of the digital economy, central banks around the world have begun exploring the possibility of a Central Bank Digital Currency (CBDC). CBDC is a digital form of fiat currency issued by central banks, similar to the paper money and coins we use every day, but presented in a digital format and supported by the government. Therefore, CBDC is different from cryptocurrencies like Bitcoin: CBDC is a legal currency issued by a country, while most cryptocurrencies are issued by private institutions or decentralized networks and are not controlled by any state.

Types and Technical Features of CBDC

CBDC mainly comes in two types:

• Retail CBDC: Used by ordinary consumers for daily payments and transactions. This type of CBDC allows people to easily make payments using their mobile phones or other digital devices, without the need to carry cash, and can be used at any time and place.
• Wholesale CBDC: Used for clearing and settlement between banks to enhance the stability of the financial system. Wholesale CBDC allows funds to be transferred between banks more quickly and securely, reducing intermediaries and improving the overall efficiency of the financial system.

Technically, CBDC may adopt technologies such as blockchain, but unlike the decentralization of cryptocurrencies, CBDC is controlled by the government or authorized institutions. Transactions are strictly regulated, transparent, and traceable. This means that central banks can restrict certain transactions, freeze funds, or even prevent illegal funds from circulating. The technical design of CBDC also needs to consider efficiency, security, and privacy protection to ensure that users' transaction data is not misused.

Why Are Countries Promoting CBDC?

The widespread adoption of the digital economy has driven the demand for electronic payments, prompting central banks in various countries to consider issuing CBDC. The main reasons include:

• Decline in Cash Usage: With the reduction in the proportion of cash usage, central banks face a decrease in control. CBDC can help maintain influence over currency circulation.
• Addressing Electronic Payment Monopolies: The current electronic payment market is dominated by a few tech giants, raising concerns about money laundering and counter-terrorism. CBDC can provide a safer, more regulated payment option and ensure that central banks maintain control over payment systems.
• Improving Cross-Border Payment Efficiency: Current cross-border payment processes are complicated and costly. CBDC can help establish a more efficient cross-border payment system, shortening transaction times and reducing fees, which is highly beneficial for international trade and remittances.
• Enhancing Financial Inclusion: Many people, especially in developing countries, lack access to banking services. CBDC can help these individuals gain access to basic financial services, thereby improving financial inclusion.

Three Key Principles of CBDC

Central banks in countries such as the United States, Canada, and the United Kingdom, along with the Bank for International Settlements (BIS), have proposed three key principles for CBDC:

• Do No Harm: The issuance of CBDC should not interfere with central banks' control over monetary and financial stability. This means that CBDC must not negatively affect the existing financial system and must ensure overall financial system stability.
• Coexistence: CBDC should coexist with existing payment tools such as cash, credit cards, and electronic payments, providing consumers with more choices. This ensures that everyone has a suitable payment method, whether young people who prefer digital payments or elderly individuals who are more accustomed to using cash.
• Innovation and Efficiency: The design of CBDC should promote innovation and efficiency in payments, such as programmable money, which allows specific transactions to be automated, like targeted subsidies or welfare payments. These innovations can make payments more flexible and intelligent.

Benefits and Potential Risks of CBDC

Benefits of CBDC

• Promoting Financial Inclusion: With CBDC, people without bank accounts can also access financial services, improving financial inclusion. This is particularly important for people in remote areas who may have difficulty accessing traditional banking services.
• Improving Payment Efficiency: CBDC can reduce the time and cost of cross-border payments, enabling funds to flow more quickly, especially in international trade and personal remittances.
• Strengthening Policy Effectiveness: The issuance of CBDC allows central banks to directly influence the money supply without intermediaries, further improving the implementation of monetary and fiscal policies. For example, governments can directly distribute subsidies to citizens through CBDC without needing banks, allowing policies to reach individuals more quickly.
• Combating Illegal Activities: CBDC can track the flow of funds through a real-name system, reducing the risks of money laundering and tax evasion. This makes financial activities more transparent and prevents funds from being used for illegal purposes.
• Reducing Cash Management Costs: Issuing and managing cash involves high costs, such as printing, transporting, and storing money. CBDC can significantly reduce these costs since it is a digital currency that does not require physical management.
• Faster Crisis Response: In times of economic crisis or special situations like pandemics, governments can use CBDC to quickly distribute subsidies or emergency funds to citizens, increasing policy responsiveness.

Potential Risks of CBDC

• Financial Stability: The widespread use of CBDC may lead to a reduction in bank deposits, putting banks at greater liquidity risk. If most people choose to transfer their funds to CBDC, banks' funding sources will decrease, affecting their lending capacity and financial intermediation.
• Privacy and Data Protection: CBDC requires strict privacy protection mechanisms to ensure that users' data is not misused or leaked. If central banks have access to detailed transaction data, it could raise concerns about personal privacy, making it essential to establish comprehensive data protection policies.
• Technical and Cybersecurity Challenges: CBDC systems, which are accessible to the public, may expose more security vulnerabilities, leading to technical and cyberattack risks. Any technical flaws could be exploited by hackers, causing severe impacts on the financial system, and thus, significant resources must be invested to ensure system security.
• Impact on Banks' Role: If CBDC is widely used, the intermediary role of banks may weaken since individuals can hold central bank digital currency directly without relying on bank deposits. This could change the way the entire financial system operates and affect banks' business models and profitability.

Current Status of CBDC Development Worldwide

Many countries around the world are currently researching and testing CBDC, hoping to gain an advantageous position in the digital currency trend. Here are some major countries' CBDC developments:

• China's CBDC Development: China is one of the pioneers in CBDC development, having launched pilot projects for the digital renminbi (e-CNY) and conducted tests in several cities and major events, such as the Beijing Winter Olympics. China's digital renminbi can already be used in some stores and public transportation, with plans to expand its application further.
• Sweden's e-Krona: The Swedish central bank, Riksbank, is developing the e-Krona, a CBDC designed for everyday payments. Sweden has conducted several tests to explore how to introduce the e-Krona into the existing payment system to ensure the stability and accessibility of payments.
• European Central Bank's Digital Euro: The European Central Bank (ECB) is actively researching the feasibility of a digital euro. Currently, the ECB is in the exploratory phase, aiming to ensure that the eurozone's payment system can adapt to digital development while ensuring financial stability and user privacy.
• Digital Dollar in the United States: The Federal Reserve (Fed) is cautious about CBDC, mainly in the research and evaluation stage. The Fed is considering how to design a digital dollar to ensure financial stability and payment system security while meeting the needs of the public.
• Bahamas' Sand Dollar: The Bahamas was the first country to officially launch a CBDC, known as the "Sand Dollar." The Sand Dollar has been promoted nationwide, with the main goal of enhancing financial inclusion, especially in remote island areas, to help more people access financial services.
• India's Digital Rupee: The Reserve Bank of India (RBI) is also testing the use of the digital rupee. India's CBDC development aims to improve payment system efficiency and reduce reliance on cash. The pilot project primarily focuses on wholesale payments between financial institutions but may extend to everyday payments by the general public in the future.
• Nigeria's eNaira: The Central Bank of Nigeria has launched the eNaira, making it the first CBDC in Africa. The eNaira aims to promote digital payments and financial inclusion, reduce cash dependency, and improve domestic and international payment efficiency.

Conclusion

CBDC is a new form of digital currency that combines the convenience of digital payments with the credibility of central banks. However, the issuance and implementation of CBDC must consider multiple factors, including balancing innovation, financial stability, and privacy protection. Whether CBDC can play a greater role in international payments, financial inclusion, and policy transmission remains to be seen. For central banks, finding the best application of CBDC in a rapidly changing digital economy is both a significant challenge and a key reason for promoting CBDC. The development of CBDC may change the way we use money in the future, making payments more convenient, secure, and inclusive. At the same time, we must carefully address potential risks and challenges to ensure that this innovation benefits everyone.