What CBDCs Mean for the Future of Digital Payments

Central bank digital currencies (CBDCs) – fiat currencies issued in digital form – never seem to be far from the news. And interest in them has certainly ramped up in recent months, with more and more citizens wary of handling physical cash. Whether you think that sovereign digital currencies will replace cash in the short or long term, or fizzle out like previous central bank experiments, it’s clear that the buzz around them won’t expire anytime soon.

China Turns Hong Kong into CBDC Test Ground

Much of the chatter about these types of electronic money system revolves around China’s plans for a digital yuan fully backed by the country’s central bank, although around 70% of central banks are either actively exploring or experimenting with CBDCs. And things are moving much faster on that front than many people realize. In fact, the so-called DCEP project (digital currency electronic payment) is set to be rolled out for testing in Hong Kong’s Greater Bay Area over the next few weeks. Given that this testing area includes the gambling Mecca of Macau, as well as mega cities like Shenzhen, Guangzhou and, of course, Hong Kong, China’s virtual banking experiment is hardly stumbling out of the gates. Not that you’d expect anything less from a project five years in the making.

From circulating banknotes to digital tokens, Beijing is, in the eyes of many, laying the blueprint for the coming financial system, which will give governments greater oversight and the ability to better regulate debt markets while furnishing consumers with an easier means of making payments and transferring funds electronically. Some believe that if executed properly, the digital yuan could threaten the hegemony of the US dollar – and expedite the introduction of an American CBDC.

Federal Reserve Acknowledges Need for Faster Payments

Speaking of which, the Federal Reserve has lately been touting a scheme called FedNow, which aims to provide “instant access to payments, for wages, government benefits or sales, without waiting days for checks to clear.” It’s not exactly a CBDC but it indicates an acknowledgement on the part of the Fed that people crave the convenience of real-time money transfers. In any case, FedNow won’t fully launch until 2023 or 2024 which, in this present moment, seems like a lifetime away.

Looking to the Future

As far as what CBDCs could mean for the future of digital payments, the most commonly touted benefits are faster, near instantaneous payments, mobile money management and wider financial inclusion. But what happens to cash and the anonymity it can helpfully confer? If CBDCs take off, it could go the way of the dodo.

Of course, we can only speculate at this juncture about the operating model and design features of CBDCs, and indeed there are likely to be vast differences between the currencies issued between central banks. While some central banks might commission a wholesale CBDC, restricted to a subset of users and used for interbank payments and settlement transactions, others will favor a retail version more accessible to the wider public. And will it be account-based like the traditional financial system, or token-based like cryptocurrency?

Curious eyes will turn towards Hong Kong’s Greater Bay Area to see how the digital yuan fares. If it proves successful, expect the hype train to pick up speed.