Central Bank Digital Currencies (CBDC) gained the attention of the media and the financial services industry at large last summer, on the heels of the People’s Bank of China’s announcement that it would soon replace its cash in circulation with a new digital currency.

We’ve since seen responses from The European Central Bank regarding how it might incorporate a CBDC into its financial ecosystem and a request for proposals from the Banque de France for “experiment” applications for digital currency. While we at FIS view CBDC as a concept that is certainly coming, but not yet reality, there are a number of reasons that global financial institutions should have CBDC on their radar. Here’s why.

CBDC Is Not Cryptocurrency

While CBDC often gets lumped into the bucket of cryptocurrency, it is in fact, very different. Unlike blockchain-driven cryptocurrency, CBDC keeps banks at the heart of every CBDC transaction. It could manifest itself as account-based or a token, for example. In the latter case, the token would go directly to the central bank.  In essence, CBDC would be an additional payment mechanism.

Currently, some of the major discussions surrounding CBDC address how it would be classified for its life in the financial ecosystem. Would it be M0, immediately available and as liquid as cash, M1, or even M3, with a decade-long lifespan? These critical questions must be answered before we ever see CBDC launch into circulation, but banks should start to view CBDC as another payment scheme of sorts with which they may one day need to accommodate.  As such, every financial institution should start thinking about how to design, build, implement and enable a mechanism for the settlement and clearing of CBDC, as part of the overall value chain.

Why CBDC Appeals to Financial Institutions

Global financial institutions have seen a marked increase in financial crime over the last several years,  which can bring monetary costs, reputational damage and loss of customer trust for those who fall victim to it.  For example, one in three respondents to our 2019 PACE report had been a victim of financial fraud in the last year. Over the last decade, financial institutions have been fined nearly $20 billion in anti-money laundering related penalties.

Because CBDC enhances monitoring of financial activity and allows for greater control and traceability compared to cryptocurrencies and cash, it could reduce the number of financial crime incidents, may mitigate counterfeiting and tax evasion attempts and generally enhance the safety and stability of financial institutions. This will become particularly important as the payments system continually expands and evolves to include any number of traditional and non-traditional participants acting as financial services providers.   

Practical Applications for CBDC

Under our current system, payments may happen with physical cash, check, card networks, real- time payments (account to account), or electronically. CBDC could be just another payment instrument that co-exists with all the others while lowering printing costs, or it could abolish some payment types (like cash) entirely. Additionally, there are use cases where the practical application of CBDC could solve some very real challenges. Consider the recent $2 trillion economic stimulus package in the United States that issued payment to eligible Americans as part of the coronavirus relief effort, as just one example. While previous stimulus efforts reportedly took about two months to reach recipients and used a combination of direct deposit, paper checks and prepaid debit cards, CBDC could theoretically be used to send the value directly to every American electronically, greatly simplifying and expediting the disbursement process for the U.S. government.