Over the last two years, we’ve observed how digital assets have revolutionized payment and banking services. The explosion of interest in digital currencies brings with it new challenges in governance, privacy, competition, cybersecurity, and social inclusion. While a cashless future is still far away, more than 80% of central banks are either considering the launch of a central bank digital currency (CBDC) or have already done so.
Even with recent crashes and high volatility in digital currencies, ignoring them might mean being left behind. Digital money offers benefits such as lower cost, easier accessibility to banking, and better transaction speed. With fierce competition from private companies, central banks stand to lose control over interest rates, deposits and their significant share of finance if they ignore these developments.
Central bank digital currency (CBDC) developments
Currently, around 100 countries are working on CBDC at different levels, including research, testing, and distribution. In the Bahamas, the Sand Dollar has been in circulation for more than a year. In China, the digital renminbi, e-CNY, rolled out with lightning speed, making its digital wallet the fastest-growing app for downloads in the country. One in five adults has downloaded the app, using it for e-commerce or public services payments. In Sweden, Riksbank successfully completed the second phase of testing of their CBDC called e-krona, which is now technically ready to be integrated into banking networks.
In the USA, the Federal Reserve is considering how a CBDC might fit into the U.S. money and payments landscape. In January 2022, the Federal Reserve issued a report on money and payments in the age of digital transformation with the statement that “a CBDC could fundamentally change the structure of the U.S. financial system, altering the roles and responsibilities of the private sector and the central bank.”
In Canada, research on CBDC continues even though the government doesn’t see an immediate need to issue a CBDC.
PwC recently conducted research on the leading retail and wholesale CBDC projects. It noted that retail CBDC projects ―digital currencies designed for public use―have reached greater maturity levels compared to wholesale projects―digital currencies used by financial institutions that have accounts with central banks.
Deloitte, in their New Strategic Perspectives for Central Banks, Financial Service Providers and Regulators report recommends considering CBDCs as new opportunities rather than threats, arguing that collaboration between these three players to meet consumers’ expectations is essential for the success of the digital assets revolution.
The cashless society: is it imminent?
The idea of a cashless society is not new, but in recent years the COVID-19 pandemic and increased digital transformation globally have moved it a big step closer to reality. But how close are we to abandoning cash?
Of the several countries planning to go cashless in the next decade, Sweden is definitely leading the way. The country’s central bank, the Riksbank, reported that from 2010 to 2020 the proportion of Swedes using cash has fallen from 39 percent to 9 percent. Cash is mostly used by the elderly and for making small payments. Sweden’s move towards a cashless society is mainly driven by fintech companies and the development of digital technologies and innovations that fit with the modern Swedish lifestyle.
For example, there is an app for instant payments called Swish that injected a new verb into the day-to-day language: swisha (to swish). Or a mobile app, BankID, that provides a common way of identifying a user digitally to both companies and authorities. It allows for the usage of e-services and contract signing with just a code or fingerprint.
Economist Impact did a study on the extent to which digital payments are trusted by consumers and on the barriers to widespread digital payments adoption. The research concluded that the shift to a cashless society is at a crossroads and varies between countries. It is influenced by recent market fluctuations and concerns about regulations and cybersecurity.
While consumer demand for digital currencies is expected to increase with the implementation of CBDCs by governments, there are still a lot of challenges in their adoption. Cryptocurrencies are still considered extremely high-risk for merchants and consumers due to their volatility.
Due to their decentralization and the anonymity of transactions, blockchains and digital payment platforms have become a playground for cybercriminals. Data privacy and cybersecurity are common concerns among consumers considering digital currencies. Moreover, while regulators need to define common regulations for digital assets, financial service providers should anticipate risks today and implement strategies and technologies to ensure that the same level of trust they enjoy from their customers regarding fiat currency transactions extends to digital payments.