Talking tech: what is a Central Bank Digital Currency?

As retailers reduced the use of cash payments to help prevent the spread of coronavirus last year, other payment methods quickly came to the fore. It was a transformative time for the payments industry. So much so, that it was said that contactless card payments accounted for around 90% of card payments in the UK in 2020.

It is not just contactless payments that are gathering pace, though. Another area of payments that is evolving quicker than originally expected is Central Bank Digital Currency or CBDC. But what is it, and what would it mean for you?

In our latest talking tech blog, we get you up to speed on Central Bank Digital Currency or CBDC, why they are a trending fintech topic and everything you need to know about the new form of digital currency.

What is a Central Bank Digital Currency?

Put simply, CBDC is a blockchain-based digital version of cash issued by a central bank. As James Pomeroy, Global Economist at HSBC, explains, “CBDC could operate alongside notes and coins but provide a form of digital payment that is a claim on the central bank, available to all and accepted by all.”

While digital currencies aren’t new (we have all heard of bitcoin), the fact that major banks and governments are now developing CBDC as a fiat currency means that it could get an official stamp of authority and become a mainstream payment method in the near future.

Why am I hearing about this right now?

The Bahamas were the first country in the world to roll out a CBDC earlier this year – the charmingly named ‘Sand Dollar’. Since then, several countries have started to test the water when it comes to CBDC. In the past year, we’ve seen China trial the e-RMB in four cities, Sweden looking to launch the e-Krona, the US consider a move following a hearing by the Senate Banking Committee in June 2020, and UK Chancellor Rishi Sunak support plans by the Bank of England to develop ‘Britcoin’.

Why do I need to know about it?

CBDCs could become a big part of all our futures. Already this year, a BIS survey found that 86% of central banks were actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects.

As banks look to digitise their operations, the prospect of CBDC becomes more appealing, so expect to hear about more trials in the coming months.

So, should I get involved?

To an extent, this is a waiting game to see what governments and banks do and when. You may not have to wait long for trials in the UK, although Chancellor Rishi Sunak has made it clear that a digital currency will never totally replace cash.

Should CBDC come into force worldwide, businesses will need to make the shift or risk losing out. CBDC offers huge potential for the financial sector – transactions would reportedly be more transparent, move faster, and aid financial inclusion – as funds would also be accessible to those who are currently unbanked.

For now, though, we have a little while to wait until we can try CBDC out for ourselves.

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