The CBDC Advantage

The CBDC Advantage

Central bank digital currencies are building blocks for the future of value transfer, says Deloitte Global

Triggered by advances in payments and technological innovations, as well as the growing influence of cryptocurrency as an asset class, central bank digital currencies (CBDCs) have the potential to drive efficiency and efficiency of payment systems by ensuring that users have access to safe digital money. .

Additionally, they provide users with a sovereign option over other less secure digital instruments, which can lead to less reliable payments, a relatively volatile store of value, and potentially erode monetary and financial stability.

With many central banks in various stages of evaluating the launch of their national digital currencies, it seems likely that CBDCs will play a pivotal role in shaping the future of value transfer. As the use of cash declines, it will be particularly important for banks and financial services players to explore new forms of “value transfer alternatives” that may become more widely used in the payment cycle.

In addition to the potential of CBDCs to drive monetary and fiscal policy, four key factors are also driving central banks to value sovereign digital currencies:

1. The need to bring central banks back to the center of monetary creation and confidence:

Rather than remaining an observer, central banks recognize that they must play a central role in the digital currency ecosystem by providing the public with digital currencies that offer the legitimate benefits of alternative private currencies.

To build trust, most central banks also design their platforms to comply with AML/CFT (anti-money laundering and countering the financing of terrorism) and data protection requirements.

2. CBDCs have immense potential to bring efficiencies to the financial system:

CBDCs can facilitate “programmable currency” in terms of smart contracts to enable “atomic” transactions, where the transfer of CBDCs with another asset depends on the real-time transfer of the other asset.

In a multi-currency CBDC environment, this would enable payment versus payment (PvP) for multi-currency transactions or, in the case of a domestic transaction, the other asset could be a physical or financial asset allowing delivery versus payment (DVP) .

3. Improve financial access and financial inclusion:

Many central banks are turning to CBDCs to provide last-mile financial reach by eliminating all intermediaries and physical borders and democratizing financial access.

Using a two-tier CBDC model could also help participating institutions use open banking frameworks to innovate more relevant customer value propositions.

4. Strengthen monetary and fiscal policy:

The architecture and structure of CBDCs could allow seamless and transparent distribution of government benefits to individuals, thereby improving transaction control.

CBDCs also improve financial stability by managing liquidity restrictions, provide the public with alternatives to cryptocurrencies, reduce the risk of identity theft, and protect purchasing power to maintain the real value of money for the public. ‘economy.

ASIA SET THE RHYTHM

Seven of the top 10 global CBDC projects are in the Asia-Pacific region. In Southeast Asia, some of the latest developments include:

Cambodia: The Bakong CBDC was launched with the aim of reducing dependence on the US dollar. The supported use case is for cross-border transactions, where reliance on a bank account is eliminated by allowing the customer to transfer any amount directly to a Bakong wallet linked to the recipient’s number.

Singapore: Launched in 2016, Project Ubin is a collaborative project between different industry bodies to assess the implications of having a tokenized form of the Singapore dollar on a distributed ledger. While the first two phases focused on domestic payments and technology capabilities, the next two phases focused on network interoperability and cross-border facilities. The final phase of the project is to have a common platform to enable ever faster transactions.

Thailand: The Bank of Thailand has launched retail CBDCs, with the pilot to be conducted this year. The pilot will be conducted in two phases, with the first phase laying the groundwork for evaluating the use of CBDCs for cash equivalent transactions. The second phase will include innovation and new use cases, as well as the collaboration of private actors and technology partners.

Hong Kong and Thailand: In 2018, the Hong Kong Monetary Authority (HKMA) and the Bank of Thailand launched Project Inthanon with the aim of improving cross-border wholesale transactions. The project will be carried out in two phases, with the first phase focusing on cash and bond tokenization, while the second phase will focus on reconciliation and data management.

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