Digital assets and CBDCs are here

CBDCs vs. crypto

CBDCs are digital assets issued directly by a nation-state’s central bank or reserve bank, and they can serve as legal tender just like fiat money. Like cryptocurrencies, CBDCs are considered digital assets (i.e., electronic files whose content holder can use them at their discretion). However, CBDCs are regulated by a central government authority, while cryptocurrencies are governed by a decentralized autonomous body.

This new approach to digital money tries to address some of the pitfalls of both fiat money and cryptocurrency, which is likely why 60% of central banks are experimenting with CBDC technology.¹ What’s unique and useful about digital assets is the ability to transfer ownership electronically without using paper documents (and CBDCs aren’t the only digital money with that benefit). CBDCs have this advantage over fiat money, along with the fact that they are considered less volatile than crypto assets. Additionally, CBDCs may serve to streamline cross-border payments and provide a vehicle for peer-to-peer transactions among the “unbanked,” offering the public broad access to digital money from a central bank. In other words, the hope is that CBDCs could promote efficiency and equity in banking.

Regional responses to CBDCs

Plenty of regions and countries have noticed these benefits and have been exploring how to build CBDC functionality and address the accompanying concerns and opportunities. For example, the US Federal Reserve is interested in how these assets can preserve the US dollar’s global dominance and encourage innovation in the private sector. That being said, there are potential risks and policy considerations that governments are examining. CBDCs will change elements of present-day financial systems, and that could mean less leverage over monetary policy. Governments are also exploring the potential privacy concerns and financial crimes that might arise from the use of these digital assets. These concerns have often prompted a cautious approach to CBDCs.

In Europe, for instance, central banks spotted the opportunities and challenges related to digital currencies early on (in fact, the Bank of England raised questions around CBDCs back in 2015). But while the Banque de France has run several remarkable experiments around wholesale central bank digital currency (including a test of a fully digital euro and Swiss franc), this currency isn’t accepted within the European regulatory frameworks. At least, not yet.

Other regions have taken more assertive approaches based on their needs. Asian countries often face high remittance and cross-border trading costs, limited financial inclusion, and overreliance on the US dollar—issues that could be addressed by CBDC-related programs. For example, China released its digital currency electronic payment (DCEP) pilots in mid-2020 that aim to expand access for the unbanked while also simplifying transactions. But these DCEP pilots aren’t the only initiatives coming to fruition in Asia. Thailand and Hong Kong created a CBDC platform using distributed ledger technology, while Singapore launched Project Ubin to explore blockchain technology for securities settlement and cross-border payments.

This is just an initial glimpse of the global digital assets landscape. To get a fuller picture, download our report. It offers critical insights into the development of digital assets in the United States, Europe, Africa, India, and broader APAC regions. The full effects of implementation efforts, particularly worldwide, have yet to be determined. But as the process unfolds, we’ll be watching—and we invite you to join us.

Endnotes

¹ BIS, “BIS Innovation Hub work on central bank digital currency (CBDC),” accessed August 26, 2022.

About Blockchain & Digital Assets at Deloitte

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