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Insights and Expertise

The promise, challenges and unanswered

questions of CBDC – Part 1

But this digital money wasn't exactly issued by the central
bank, (so it gets another name, M1) and should you decide
to put some of it into a deposit account it gets called
something different again, (M2 or M3—exact definitions
can vary from country to country). Already we can see that
money is something of a movable feast. This taxonomy of
money is useful because it shows that "money" is not just
one thing, but different depending on its usage.

So why do we need another type of money? What can a
central bank digital currency do that existing digital money
can't, and why are some central banks getting excited
By Mark Dillon about them (in so far as central banks convey excitement),
Ingenico while others have abandoned the idea altogether?
What purpose does a CBDC fulfill?
his is the first in a two-part series exploring
Central Bank Digital Currency (CBDC): what it Perhaps the easiest way to understand what CBDC can do
is, why central banks are considering it and the is to see its use as identical to paper money, only money in
T challenges it presents. For some, money makes a digital form.
the world go round; for others, Money? It's a crime; but we
can all probably agree that money can't buy you love. You When governments (or back in the day kings), reserved
probably recognize popular song lyrics in this article's themselves a monopoly on minting money, it was for
opening lines. While songwriters may find the topic a good reason: they earned revenue from it, (seigniorage);
source of contrasting inspiration, either way, money mat- it ensured that the thing they called "money" was the
ters. same everywhere (no counterfeiting); and there was
an understanding that it was important not to have too
Anyone with a rudimentary knowledge of macroeconomics much of the stuff – which is why they eventually tied it to
knows that money goes beyond the notes and coins we – something rare and hard to get: gold.
still – have in our pocket, (M0 in economic jargon).
Central banks see an opportunity to do the same
The digital money we spend with a credit card performs with digital currency. (The conditional is important
exactly the same function as a euro note, a dollar bill or a here. While the functioning of cash is similar in
pound note: it is a means of exchange, a unit of account almost every jurisdiction, and while the international
and a store of value, all of which combine into what the payment schemes—Visa, Mastercard—bring a degree of
19th century economist William Jevons called a "standard homogeneity and standardization in all their markets, a
of deferred payment" or put simply, an accepted way to standard definition of CBDC remains to emerge).
settle a debt.
A well-designed CBDC would aim to replicate all the
attributes of cash but in a digital format:
What is CBDC?
• instant value transfer (when you pay with cash,
ownership immediately changes hands – a CBDC
A central bank digital currency (CBDC) is a digital form could enable this same instant, direct transfer
of a country’s official currency, issued and regulated by digitally;
the central bank. Unlike cryptocurrencies, which are de-
centralized and privately issued, a CBDC is backed by the • privacy - cash transactions are intrinsically
government and maintains the same value as physical cash private—neither the payer's source of funds nor
or traditional bank reserves. It is designed to function as what the recipient does with the funds unless they
a secure and efficient medium of exchange, store of value, are deposited in a bank is known to either party. A
and unit of account, while leveraging digital technology CBDC could mimic this feature to the extent that
to enhance financial inclusion, streamline payments, and government decides it should do so.
improve monetary policy implementation. CBDCs can be
structured for retail use (accessible to the public) or whole- While instant transferability of value is feasible and
sale use (for financial institutions). uncontroversial, will governments really allow total

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