HSBC economist James Pomeroy suggests that central bank-issued cryptocurrencies offer benefits such as higher efficiency in currency transactions, seamless and nearly cost-free payment processes, and a more streamlined financial system.
As the use of cash declines worldwide, central banks are actively exploring the issuance of digital currencies. Some are concerned about privately issued cryptocurrencies potentially dominating national payment systems.
According to a report by Pomeroy, central bank digital currencies (CBDCs) could help reduce tax evasion and other criminal activities. Additionally, they would allow central banks to monitor transactions in real time, enabling more precise monetary policy adjustments and supporting economic stability over business cycles.
The report highlights that Sweden’s Riksbank may be among the first to launch a CBDC. Several other central banks—including those of China, Canada, Singapore, and Saudi Arabia—are also conducting tests and research.
Although the buzz around cryptocurrencies like Bitcoin has somewhat faded, central banks are still carefully weighing the potential benefits and challenges of issuing their own digital currencies.
Pomeroy points out that advantages go beyond crime reduction. They include greater transaction efficiency, seamless low-cost payments, and a simpler, more integrated financial infrastructure.
Understanding the Benefits of CBDCs
The shift toward digital currency isn't just a matter of keeping up with technology. There are tangible economic benefits. For instance, the Bank of England estimates that issuing a digital currency equivalent to 30% of GDP could increase economic output by 3%, thanks to reduced transaction costs and improved tax compliance.
Digital transactions are harder to use for illegal purposes such as tax evasion and money laundering. With CBDCs, every transaction can be tracked in real time, offering transparency that cash cannot provide.
This enables more responsive monetary policy. Central banks could implement changes almost instantly, making their interventions more effective during economic fluctuations.
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Current Technological Limitations
Despite the promising advantages, significant technological barriers remain. Current blockchain technology, which underpins most cryptocurrencies, is not yet advanced enough to support nationwide payment systems.
For example, Visa’s network can handle around 56,000 transactions per second. In contrast, Bitcoin processes only about four transactions per second. Although newer cryptocurrencies perform better, blockchain as a whole still lacks the scalability required for mass adoption.
Security is another major concern. The risk of hacking and data theft presents serious challenges. If a central bank’s digital payment network were compromised, the impact could be widespread and severe.
Financial Stability Concerns
The Bank for International Settlements (BIS) has warned that a fully digital central bank currency might make the financial system more vulnerable to digital bank runs. In times of crisis, people could move their funds from commercial banks to the central bank instantly, potentially destabilizing the banking sector.
This introduces a new dimension of risk. While CBDCs can make payments more efficient, they also require careful design to prevent unintended consequences for financial stability.
Ongoing research and pilot programs are essential to understand these dynamics fully. Many central banks are proceeding cautiously, running limited tests before considering full-scale implementation.
Frequently Asked Questions
What is a central bank digital currency (CBDC)?
A CBDC is a digital form of a country’s official currency, issued and regulated by the central bank. It aims to combine the efficiency of digital transactions with the stability and trust of traditional fiat money.
How could a CBDC reduce criminal activity?
Because CBDC transactions are traceable in real time, it becomes much harder to use them for illegal activities like money laundering or tax evasion compared to physical cash.
Which countries are leading in CBDC development?
Sweden, China, Canada, and Singapore are among the nations most advanced in researching and testing central bank digital currencies.
What are the main risks of CBDCs?
Key risks include technological limitations, cybersecurity threats, and potential financial instability—such as digital bank runs—if the system is not carefully designed.
Can CBDCs improve monetary policy?
Yes. With real-time data on economic transactions, central banks could make more informed and timely decisions, enabling finer control over the economy.
Will CBDCs replace cash completely?
Not necessarily. While digital currencies may reduce the use of cash, many central banks are considering hybrid models that preserve access to physical money for those who need it.
Central banks worldwide are taking meaningful steps toward understanding and implementing digital currencies. While challenges around technology and financial stability remain, the potential benefits—such as reduced crime, greater efficiency, and improved monetary policies—make CBDCs a compelling area of development in modern finance.