Unsurprisingly, the pandemic has led many of us to rely on digital payment methods over cash. In fact, 25% of US consumers are currently using less cash than they were before March 2020. In addition, government policies around the world are now pushing for the adoption of digital currencies to encourage contactless payments. For example, China’s central bank branch is trying to eliminate banknotes from certain sectors. But what is the alternative for the central banks without cash payment?
Enter – Central Bank Digital Currencies (CBDCs).
The rise of the CBDCs
A CBDC is the sovereign equivalent of private cryptocurrencies and digital assets issued and controlled by a country’s central bank and used by individuals and businesses for retail payments. The overall job of CBDCs is simple: to move money as well as information. To stay current in today’s ever-evolving digital marketplace, central banks need to actively review the pros and cons of offering a private digital currency in their region. In fact, 86% of central banks¹ are already investigating a possible introduction of CBDC, with more than half moving from research to pilot projects.
China has started trials with e-yuan currencies on the planned start date of February 2022. European officials want to introduce a digital euro by 2025. The Bahamas have put their version of “The Sand Dollar” into circulation². The United States announced that it is investigating a US digital dollar³, a tokenized version of the known dollar.
This form of private cryptocurrency plays a crucial role in the new global financial infrastructure on which blockchain technologies are based.
Some of the key benefits of CBDCs:
- Extend the existing payment system by increasing the speed and efficiency of payments while reducing costs and failure rates.
- Promote financial inclusion Improving access to financial services for populations under and without banks.
- Promote greater competition by removing barriers to entry and improving access to global markets through interoperability.
- Promoting innovation with advanced digital features like smart contracts and programmable money.
- Stay in control by ensuring that central banks retain sovereignty over monetary policy and not allow alternative currencies to dominate the market.
Interoperability: The Key to Success
By 2024, at least half the world’s population is expected to use digital wallets for transactions valued at more than $ 9 trillion a year.
With this in mind, a certain degree of interoperability must be built into every CBDC. Interoperability is the ability to share and access information across multiple networks without the need for an intermediary, reducing costs and saving time for the parties involved.
A BIS survey¹ found that improving the efficiency of payments was the main motivation for adopting CBDCs. And rightly so – without seamless domestic and cross-border functions, most CBDCs will fall well below their potential.
In today’s globalized world, consumers and businesses inevitably need to do business with overseas suppliers and vendors. CBDCs that are interoperable with one another give these countries a competitive advantage. Each government can create their own CBDC rules and guidelines that best suit their home market. However, CBDCs should also be united through collective protocols that allow them to work seamlessly with other CBDCs and digital currencies to facilitate cross-border payments.
In March 2021, we announced our CBDC solution, which provides central banks with a secure, controlled and flexible means of issuing and managing digital currencies. The CBDC Private Ledger is based on the same blockchain technology as the XRP Ledger (XRPL). It also uses RippleNet technologies and the Interledger Protocol (ILP), bringing together the best of technologies to meet the needs of central banks.
Ripple is currently working with central banks to discuss how our private ledger can help them meet their CBDC goals.
We look forward to the next evolution of money.
For more information on CBDCs, check out our webinar on CBDCs and interoperability. Contact email@example.com to find out how your organization can get involved.