A CBDC, or Central Bank Digital Currency, is a form of digital money denominated in the national unit of account — US Dollars, Japanese Yen — which is a direct liability of the central bank. CBDCs can be used exclusively by financial institutions, retail consumers, or both.
Globally, central banks have been researching CBDCs since the mid-2010s. Research has accelerated over the last two years, as stablecoin demand and the growth in digital assets indicate demand for digitally native money. Sovereign digitally native money also threatens the ability of central banks to control monetary policy. Money is ultimately a zero-sum game — every unit of account that flows into digital assets or stablecoins is a unit of account that exists outside the “traditional” finance system.
In October 2020, the Central Bank of the Bahamas issued the Sand Dollar — the first live retail CBDC. As of mid-2021, at least 56 central banks had published retail or wholesale CBDC work.
My hot take:
To me, it’s not “if” but “when” major global central banks introduce CBDCs. My conviction is predicated on one fundamental reason: major global central banks have largely run out of legacy tools to implement monetary policy effectively. The 2021 “inflation is transitory” narrative and the likely policy mistake of hiking rates during a recession are exhibits A and B of suboptimal decision-making due to legacy data infrastructure.
CBDCs are not without their tradeoffs — particularly around privacy. A direct CBDC model effectively gives the central bank a record of all retail holdings, disintermediating commercial banks. These design questions are the fundamental tension that central banks are grappling with, and they won’t resolve cleanly.