With cash becoming less prevalent year-by-year, financial institutions and providers have been accelerating methods to digitise money whether it be through banks, or currencies themselves. 

Through the rise of cryptocurrencies, Central Bank Digital Currencies (CBDCs) have become a major talking point for governments and central banks across the globe, and whilst they do not hold the same qualities as a standard cryptocurrency like Ethereum, CBDC’s hold the potential to transform how consumers interact with money. 

But do they offer long-term financial stability? This was discussed in a recent panel during this year’s Fintech Talents Festival, where experts in the finance sector deliberated over whether CBDC’s will become a reality in the coming years. 

CBDCs may be coming sooner than you think. India has just released a pilot for a Digital Rupee which they believe could help stabilise secondary market transactions and if successful, could be launched soon. 

Further along in their development of a digital currency is Japan, who have just announced that they will go live next year with a Digital Yen but are countries like Japan and India using the same model to launch these CBDC’s? Head of Digital Policy at Barclays, Nicole Sandler, believes there isn’t a “one-size fits all” case. 

She said: “A lot of countries are now looking at CBDC’s, but it isn’t a one size fits all reason why someone would go down the route of a CBDC. If you look at the US, EU and UK they have made no issue of releasing a CBDC yet they are just investigating it, and investigating it really heavily. 

“But there are different reasons for looking into it could be different to say the Bahamas, where it is very much the case of financial inclusion – where there are hundreds of ATMs on the islands, so having a CBDC for them makes a lot of sense. 

“Other countries you might see if for monetary reasons, who don’t want to have a global stablecoin launched by a large company. Trying to keep monetary sovereignty in the hands of a central bank. 

“During the pandemic, a lot of the world went cashless. So if you want to be able to issue public money and you don’t have cash, then digital currency will be a way to issue that.”

Regulators within the European Union (EU) have been quick to act on the potential of digital coin transactions and their place within the wider payments sector. The EU will launch the MiCA (Markets in Crypto Assets) bill in 2024, which will have all cryptocurrency and digital currency data traced by a service provider. 

And whilst the UK are exploring the idea of a Digital Pound in the coming years, the US and other major countries have been cautious when proceeding with talks with developments of a CBDC. 

This is because cash is still very prevalent as it holds financial inclusion qualities for people who may not even have a bank account to access digital currencies. 

Marion Laboure, Macro Strategist at Deutsche Bank, reveals even though we are heading further into a cashless society, cash remains important but it must complement the needs for CBDCs. 

“We are seeing less and less cash with one example being Sweden, where they have been using less cash since 2007, moving into a cashless society already,” she said. 

“Cash as a means of payment has been declining, so that’s why banks have been looking at CBDCs but not just banks, regulators too to make CBDCs and cash complimentary. Because we also need cash for financial inclusion for those who do not have a bank account. 

“But there is only a certain amount of cash you keep stored, with manual factor risks included also. Bank accounts are easier, safe and secure.”

The difference between a CBDC and the money you hold in your online bank account was clarified during the panel, as a CBDC is issued by a central bank and works in the same way fiat currency would work as a form of payment, which is a liability on behalf of the central bank as it is the issuer. 

Money in an online bank account is a liability on a commercial bank, and represents a balance of payments and a representation of transactions. 

However, people are more reluctant to hold currency or use forms of payments they do not understand. CBDCs are still a new concept and will take time for people to adjust too, as risks are still being explored as to what extent they can offer financial stability. 

Former Bank of England figurehead, now CBDC and Market Infrastructure Director at Web3 company Fireblocks, Varun Paul went into detail as to how a CBDC could come to fruition, the early growing pains it may experience but also the benefits too. 

He explained: “Most central banks around the world and especially within the UK, there are two forms of stability: system stability and financial stability. 

“If the central bank introduced something that pretty much wiped out the baking system overnight, that would not be considered financial stability. For that reason alone, the central bank will not release a CBDC overnight. 

“They are much more likely to design a CBDC if it is intermediated with all the same benefits, with just an intermediate in the middle with a retail customer at the end, and at no point can that retail customer do a run on the whole banking system. 

“The other great benefit about that is not relying on the central bank who decides to get money. It requires commercial incentive to create the right blend of decision making. It would also require the central bank to do KYC and AML checks on every single transaction, which is very risky and time consuming. 

“It requires intermediaries. It doesn’t always require banks, because central banks would like competition between banks and non-banks, but they will always want an intermediate in the system.”