Digital money is moving fast

In a digital age where technology influences every aspect of our lives, Central Bank Digital Currencies (CBDCs) have emerged as a significant focus for governments, financial institutions, and businesses. These digital versions of national currencies promise enhanced security, efficiency, and increased financial inclusion. However, they also raise questions regarding architecture, technology, and governance. Download the factsheet for an in-depth exploration of the various CBDC models and their implications for central and commercial banks, as well as citizens and customers.

What is a CBDC?

A CBDC is a government-issued digital version of a country's fiat currency, regulated by a central authority, and managed by a central bank. Unlike decentralised cryptocurrencies like Bitcoin, CBDCs are centralised, state-owned, and recognised as legal tender.

Digital money is moving fast

CBDCs and their impact on banks, citizens and customers

Download

CBDC models

Central banks globally are at various evolutionary stages with CBDCs, so there are currently many models and approaches. Governments and financial institutions are conducting real-world tests to explore the desirability, feasibility and viability of each type.

These digital currencies promise to reshape domestic and international financial systems, but their success hinges not just on individual attributes. They must also be able to interact seamlessly with other CBDC systems. Main CBDC models follow the four following archetypes:

Wholesale CBDC for domestic use

Focusing first on Wholesale CBDCs aimed at domestic financial institutions, these have significant potential to revolutionise domestic payment systems and interbank settlements. While they are feasible and advantageous for these specific sectors, it's worth noting that their scope and impact are confined to a specialised market within the financial industry.

Retail CBDC for domestic use

Turning to Retail CBDCs, which are intended for the general public, these offer notable benefits from a consumer standpoint. However, their introduction poses considerable challenges in terms of feasibility. Specifically, there are concerns about how these might disrupt existing commercial banking systems and potentially destabilise financial markets.

Retail CBDC for cross-border use

Using Retail CBDCs for cross-border transactions offers advantages, but these are largely theoretical at this stage. While they could offer benefits to individual consumers engaging in international trade, several obstacles stand in the way, such as foreign exchange management, consumer protection and regulatory compliance.

Wholesale CBDC for cross-border use

Finally, of the various options, Wholesale Cross-Border CBDCs are emerging as the most balanced in terms of desirability, viability and feasibility. These digital currencies hold promise for significantly streamlining international trade by eliminating inefficiencies in traditional banking systems, allowing multiple currencies and assets to be settled and various access policies to coexist.

As central banks worldwide explore various CBDC models, Wholesale Cross-Border CBDCs have emerged as a top priority for many, due to their desirability, viability and feasibility. This shift marks a transition from years of theoretical study to the actual process of productisation.

Preparing for a CBDC future: Opportunities and risks

CBDCs offer efficient payments, cost savings for central banks, and financial inclusion. However, they require acceptance, address regulatory challenges, and demand robust security measures.

The current momentum is leaning towards Wholesale Cross-Border CBDCs, but there are key questions that central and commercial banks must address. These range from legal and regulatory considerations to implications for monetary policy and financial stability.

CBDCs are rapidly gaining momentum, so there’s a need for meticulous planning, in-depth analysis, impact assessement and a keen eye on balancing risks and ambitions. And as the concept of CBDCs becomes more widely accepted globally, specialised expertise will become paramount.

Download the full factsheet for key questions, project examples and more insights on how KPMG can help both central and commercial banks navigate the complexities of CBDC implementation effectively.

Innovation in digital currencies is likely to change the business model of commercial banks, and their relationship with central banks. As banks start to prepare for the increasingly imminent era of CBDCs, a number of important questions warrant attention from both sides.

Antony Ruddenklau