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Central Bank Digital Currencies (CBDCs) arguably represent the greatest threat to banks? current business models since the 1600s. By changing the way in which value is exchanged, these nascent digital currencies have the potential to disrupt the banking model itself. However, for many in the industry CBDCs continue to be something of an enigma. It isn't always clear what CBDCs are, how they work, or what threat they actually pose to current money flows.
So what do you need to know about CBDCs? How much progress is happening in this space? And what sort of practical use cases could we see in the future?
Amidst the rising price of bitcoin and surging interest in cryptocurrencies, central banks have been keen to develop something they can manage and regulate themselves. At the same time, there is a growing focus on countering the proliferation of unregulated digital tokens and currencies - such as Diem, the digital coin backed by Facebook - by providing digital equivalents. And another driver is the need to improve the efficiency of payments in support of cross-border trade.
These factors have given rise to the concept of Central Bank Digital Currencies (CBDCs) - a broad term used to describe a digital form of currency issued by the relevant country or region's monetary authority. Broadly speaking, CBDCs come in two distinct flavours: retail CBDCs, which are targeted towards consumers, and wholesale CBDCs, which are targeted towards banks. Another point of distinction can be drawn between account-based and token-based models. With a token-based CBDC, the payee verifies the transaction by confirming the validity of a token, whereas an account-based CBDC transaction is verified by confirming the account holder's identity.
At this stage, central banks around the world are at varying stages of launching and issuing digital currency:
Also of note are collaborative efforts such as Project Ubin, an initiative led by the Monetary Authority of Singapore (MAS) to explore the use of blockchain technology for the clearing and settlement of payments and securities. Meanwhile, Project Dunbar is an initiative by the Bank of International Settlements to test the use of CBDCs for international settlements, with involvement from the central banks of Malaysia, Singapore, South Africa and Australia.
A further significant development is J.P. Morgan's blockchain Onyx, which has been used for pilot CBDC transactions by Banque de France and MAS.
So what are the opportunities arising from digital currencies? ?In particular, we have identified three use cases in which we see the potential to leverage CBDCs:
To find out more about how CBDCs will shape the future of finance join us on 20 September for our webinar; ?Making the world of finance open and connected with digital currencies?
Madhav Soundalgekar, Principal Solutions Consultant, Finastra