Surendra Rosha

Macroscope | How to unleash the potential of CBDCs without disrupting commercial banking

The wholesale central bank digital currency model, combining commercial banking expertise with the guarantee of central bank involvement, is the way forward

The challenge is to design infrastructure to maximise benefits such as better cross-border payment, without creating new vulnerabilities in the global financial system

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People walk past a digital yuan (e-CNY) sign during the 2021 China International Fair for Trade in Services (CIFTIS) in Beijing on September 5. Much of the CBDC dynamism is in Asia, and the principal focus is on China. Photo: Xinhua

Surendra Rosha

Published: 4:30pm, 31 Jan 2023

Much of the debate around central bank digital currencies (CBDCs) has focused on their domestic impact, but they have the potential to transform the most fundamental building blocks of international economic activity by creating new opportunities for faster, cheaper and more secure cross-border payments.

CBDCs have enormous potential, but as with any disruptive new technology, they must be designed carefully to ensure the costs of change do not outweigh the benefits.

More than 100 countries, including 19 of the Group of 20 economies, are considering introducing some form of CBDC. Much of the dynamism is in Asia, and the principal focus is on China. In addition, Australia, Hong Kong, India, Malaysia, Singapore, South Korea and Thailand already have pilot programmes in various stages of completion.

Unlike some other digital currencies, CBDCs are backed by the full power of the state, offering stability and avoiding many of the risks of stablecoin and other cryptocurrencies. CBDCs will behave very much like the cash in our online bank accounts and retail users will see little difference – but CBDCs hold the potential to streamline payments, ushering in a new era of low-cost, secure and near-instantaneous transactions, while spurring economic growth and financial-sector innovation.

Among the biggest beneficiaries could be small and medium-sized enterprises (SMEs), the engine of economic growth in much of the world. The burden of today’s long settlement times and high exchange costs often fall disproportionately on smaller enterprises, squeezing their cash flow and blunting competitiveness. If well designed, CBDC payment approaches could help ease some of these pressures.

There are still many unanswered questions. Should CBDCs be limited to settlements between banks and big businesses, or available to everyone? How will CBDCs coexist with the private money in the commercial banking system, so that banks can continue to play their vital role of lending to the economy and supporting growth?