Central Bank Digital Currencies (CBDCs) are gaining traction globally, with over 100 countries currently in the process of developing them, and 11 countries have launched their own CBDCs.
CBDCs are digital versions of a country’s currency, accessible to the public through personal devices, and backed by the central bank.
Below, we’ll take a closer look at the opportunities that CBDCs present for banks and fintechs.
Why are Central Banks Rolling Out CBDCs?
There are several reasons why central banks are in a rush to roll out CBDCs:
- Rise of Cryptocurrencies and Crypto Assets: Central banks are concerned about the increasing activity in this volatile, unregulated market and the financial instability it brings. Issuing CBDCs is a way of reinforcing the central bank’s role of establishing and conducting monetary policy in a rapidly changing, interconnected financial ecosystem.
- Push for Digital Payments: With less cash being used, private sector solutions providing digital payments are becoming more popular. This can diminish the role of the central bank, and in the case of cryptocurrencies, circumvent regulations.
- Geopolitical Motivations: CBDCs could be used for almost instant settlement across borders without any intermediate currencies being involved. CBDCs, crypto assets, and blockchain are being explored by central banks to reduce the dominance of the US dollar in international transactions.
CBDCs, Crypto Assets, and Blockchain
While there is speculation that crypto will play a role in government-backed financial initiatives, cryptocurrencies are too volatile for governments to plan tax revenues, expenditures, and economic activity around them.
Instead, international financial agencies and central banks around the world are interested in aspects of blockchain technology, such as permissioned ledgers that can be merged into existing regulatory frameworks.
Potential Applications of CBDCs
CBDCs could have several applications, including back-office functions, cross-border payments, and trading.
Fintechs and commercial banks can play a critical role in the development of CBDCs.
- Enabling Cross-Border Transactions: Fintechs that provide blockchain technology may be called to participate in developing cross-border payments using CBDC. CBDCs of various countries could be exchanged in real-time on digital platforms, benefitting developing countries especially.
- Payments Interoperability and Inclusivity: Fintechs could provide valuable consulting services, technological innovation, and integration assistance to ensure that the domestic and global payment systems remain unified and inclusive.
- Designing CBDCs for Adoption: Fintechs can provide their expertise in technologies such as distributed computing, distributed ledger, machine learning, and predictive analytics to design CBDC solutions that will be widely adopted as soon as they are launched.
- Innovation Labs for Experimentation: Central banks are teaming up with fintechs to experiment with existing digital infrastructure and services such as blockchain-as-a-service to pilot and launch prototype CBDCs.
Preparing for Disruption
The adoption of a CBDC will most likely bring new digital business models and additional opportunities to commercial banks and financial service providers for revenue and growth.
As central bank experts strive towards partnerships to build innovation, companies will benefit from knowledge sharing and new models of collaboration.
The Bottom Line
CBDCs represent a significant opportunity for banks and fintechs to leverage their expertise and innovate in the rapidly developing digital payments space.
While the development of CBDCs is still in the early stages, fintechs and banks can start preparing for disruption and positioning themselves as enablers of innovation.