Between hype and hope: CBDC, the FX game changer?

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Opinion piece
20 min read
11 March 2024
Dirk Bullmann
Global Head of Public Policy
Sophie Dalzell
Public Policy and Innovation Specialist

Discussions around central bank digital currencies (CBDCs) intensified almost a decade ago. Initially focusing on wholesale payments, the conversation soon shifted to retail CBDCs. More recently, wholesale CBDCs are stepping into the spotlight again. What caused this shift in focus, what is the business case for wholesale CBDCs and how could they impact the FX market and CLS specifically? 

The advent of the CBDC

CBDCs are considered an advanced form of central bank money. CBDCs are different from cash and from balances in traditional accounts with a central bank,[1] though all are a direct liability of the central bank.[2] The extent to which a CBDC differs from existing forms of central bank money depends on the specific CBDC purpose and design.

Public discussion around CBDCs gained impetus around 2017,[3] when the global market capitalization of crypto assets started to soar [4] and the industry and central bank community intensified research and experimentation on distributed ledger technologies (DLT). CBDCs gained further attention with the advent of global stablecoins in 2019.[5]

While many herald CBDCs as an innovation that could potentially transform payments,
detractors dismiss it as a recycled idea. CBDC’s critics note the underlying concept
has been discussed amongst experts for decades without much public attention,[6]
and the basic idea traces back to the traditional view that currency is a public good under
government control.[7]

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1 See CPMI – Markets Committee (2018) Central bank digital currencies.2 See Group of Central Banks (2020) Central bank digital currencies: foundational principles and core features.3 See Bank of England (2015) One Bank Research Agenda (page 7: “…might central banks issue digital currencies and what would be the impact on existing payment and settlement systems?”) or CPMI (2015) Digital Currencies (page 17: “This raises the question of how central banks could respond to an increasing use of distributed ledger technology to settle transactions. One option is to consider using the technology itself to issue digital currencies.”)4 The market capitalization of crypto assets increased from USD15 billion in January 2017 to over USD600 billion at the end of 2017; see Coindesk (2017) The year crypto became a new asset class.5 See G7 Working Group on Stablecoins (2019) Investigating the impact of global stablecoins.6 See Tobin, J. (1985) Financial innovation and deregulation in perspective.7 See Friedman, M., Schwartz, A. (1986). Has government any role in money?; Journal of Monetary Economics.