CBDC Frontiers

What are the hot topics in CBDCs right now? I think they are privacy, consumer accounts, offline use, and cross-border payments.

Privacy in individual transactions using a central bank digital currency is a major concern, especially in Western Europe where cash is highly valued for its anonymity in transactions. A lot of work is being done to figure out ways to allow CBDC users to preserve their privacy in transactions while not opening the door to money laundering and other illegal uses of a digital currency. Ideas being explored to ensure privacy include advanced cryptography (like zero knowledge proofs) and spend limits (where transactions under a certain amount remain unrecorded).

Consumer accounts refer to the idea that every central bank digital currency user should have an account with the central bank. This would allow for financial inclusion and lower the cost of transactions (and many banking functions) to the public at large. Working against this idea of a “retail” CBDC is the resistance of central banks to taking on a new retail function. Also, such an idea would take business away from the banking industry. This disintermediation is a major concern in the deployment of a CBDC.

Allowing for the use of a CBDC offline, away from an electronic network, is becoming a major concern. There are many people around the world that do not have regular, or any, access to the internet. They may lack a smartphone or computer, live in an internet desert, or may not even have dependable electricity. To these people, a CBDC would be useless. Thus, ideas of e-purses (rechargeable cards) or cryptobanknotes (cash with augmented capabilities) are being developed to allow for offline deployment of CBDCs.

Lastly, there is the cross-border settlement between banks and concerns of interoperability between difference central bank digital currencies. These items have garnered serious attention with projects in the Far East. The study of mCBDCs or multiple CBDCs seeks to overcome the problems that could be encountered when central banks seek to perform cross-border settlements using their own central bank digital currencies. Ideas to solve potential problems include setting standards for the building of compatible CBDCs, building interlinked systems, and building one, universal CBDC that all banks could access.