The potential impact of CBDCs on the global financial system

Central Bank Digital Currencies (CBDCs) are a significant development in the global financial system. CBDCs represent a country’s fiat currency digitally and are regulated and issued by central banks. These are different from decentralized cryptocurrencies such as Bitcoin, and remain within the control of a nation’s financial authority. 

Many more countries and economic regions are beginning to look into the potential of CBDCs. Some countries have already been early adopters; others created a CBDC only to fold it some time later; and others have declared no interest in the idea at all. China is seen as one of the largest current pilots of CBDCs, with their digital yuan now available in 29 of the country’s cities. The initial response from the public has been muted, but there is hope that more time will allow increased user education and adoption. 

With CBDC interest growing year on year, what potential impact could these currencies have on the global economy? This article looks at what is currently happening with CBDCs in the world today, and what the global financial system could look like if these currencies began to roll out more widely. 

‍

The current CBDC landscape - in numbers

Here are some important numbers about CBDCs globally in 2024 so far, predominantly lifted from the Atlantic Council’s’ CBDC tracker. 

• Two. Currently, two currencies have been launched and then subsequently canceled - Senegal and Ecuador. Senegal’s eCFA was part of a collaboration between international fintechs and the central bank of the West African Economic and Monetary Union. After a number of regulatory concerns failed to be addressed, it was canceled in 2016. Ecuador’s Central Bank launched SDE in 2014 but had low uptake, and was canceled in 2017. 
• Three. The number of countries that officially have CBDCs. The Nigerian e-Naire, Jamaica’s JAM-DEX, and the Sand Dollar in The Bahamas. 
• 36. The number of current pilot programs happening globally. This includes the digital euro from the European Central Bank, which is now in a preparation stage that will end in 2025.
• 134. The number of countries exploring the idea of CBDCs. This number represents 98% of global GDP and has risen from just 35 countries since May 2020. 68 of these are in an advanced phase, and 19 are from the G20 group

‍

Financial inclusion

One of the greatest benefits of CBDCs for many countries is the possibility of wider and easier financial inclusion. This ties in with the current data of many developing countries showing interest in or already engaging in pilots for CBDCs. Digital currencies are attractive for financial inclusion because they are possible for anyone with access to a mobile phone and data. In 2023, around 6.92 billion people worldwide owned a smartphone and around 2 billion internet users accessed the internet using their phone. These numbers are almost as high in the developing world as in the developed, so CBDCs are a real tool to democratize access to central currencies for underserved populations in developing countries. 

CBDCs could also reduce the reliance on correspondent banks, which are used in cross-border payments and can be slow and expensive. By utilizing CBDCs, businesses and individuals in underbanked regions will have access to faster and more affordable payment methods. This would enable businesses to transact globally without the current barriers they face, and reduce the cost of remittances for underbanked individuals. 

‍

Banking system stability

Furthermore, CBDCs could have a significant impact on global financial stability, enhancing the resilience of financial systems by providing a more secure, transparent, and efficient means of transactions. Risks are lowered by being backed by government financial authority, as compared to private cryptocurrencies. CBDCs also offer benefits for central banks during financial crises. As seen during COVID-19, many stimulus payments across the world were dispersed ineffectively and slowly. With CBDCs, a similar scenario would allow central banks to issue stimulus payments through digital wallets already held by citizens. 

There are, of course, potential negative impacts. For example, during periods of banking instability in a country, individuals may rapidly convert their deposits into CBDCs, leading to a run on the banks and risks to the traditional banking system. Strong regulatory frameworks will need to be created to ensure that these risks are mitigated. 

It’s issues such as these that keep many countries from committing firmly to CBDCs. In China, the digital yuan is going ahead with full backing from the government. However in the United States, many believe that the upcoming election in November 2024 will determine whether CBDCs will be pursued and if the regulatory bodies in the country are willing to take that step.

‍

Cross border payments

Payments will undoubtedly change in areas where CBDCs are active, but also across borders. CBDCs will significantly impact international trade, by reducing reliance on corresponding banking networks used for cross-border payments. Cross-border payments for international trade are slow and costly and often require intermediaries. CBDCs will undoubtedly streamline that process by enabling faster, cheaper, and more transparent cross-border transactions. This will depend however on the ability of different CBDCs to ‘speak’ to one another. Direct exchange mechanisms will need to be developed to allow these transactions to happen. 

The flip side of this is that correspondent banks could see their roles eliminated. The existing role of the dollar in settlements within the international financial system will come under scrutiny if central banks can settle directly with one another. 

Several of the new members of the BRICS countries, including Saudi Arabia, Iran, and the UAE, are exploring cross-border wholesale CBDCs that offer these benefits. The mBridge cross-border central bank digital currency project for example involves Thailand, Hong Kong, China, and the UAE, and Saudi Arabia's central bank, which joined in the summer of 2024.
‍

Privacy and security 

CBDCs will raise a lot of questions about privacy and data, and have a significant impact on financial authority trust. Centralized digital currencies are not the same as crypto, and do not offer the same level of anonymity and decentralization. Many believe that this surrenders too much control to the government, and loses the privacy offered by digital assets. 

Digital currencies are also vulnerable to cyber-attacks and other security risks. Countries will require stringent security systems to keep users and citizens safe. There are also geopolitical concerns, with different countries having different interpretations, usages, and regulations around CBDCs. International cooperation would be crucial for issues such as international transactions, sanctions, and risk assessment. There are questions around monetary sovereignty, resolving conflicts, and counterparty risk that need to be answered to make sure that the global financial system is not adversely impacted.

‍

The future is here

With a number of countries already moving quickly through various preparation stages for future CBDCs, the idea of the global financial system being impacted in the near future is not theoretical. There are real, profound changes already taking place across the globe thanks to central bank digital currencies. Many of these impacts are positive, but there are risks, particularly around safety and privacy concerns, and for the traditional banking system's future. As more and more countries develop CBDCs, more issues will likely arise as they move between borders. It will take a considered global effort and cooperation to ensure that CBDCs better international trade, financial inclusion and financial stability.

‍