Central Bank Digital Currencies (CBDCs) have the potential to empower technopreneurs by offering improved financial inclusion, reduced transaction costs, enhanced security, transparency, access to international markets, and financial stability, of particular relevance in developing markets.

What exactly is a CBDC?

A CBDC is a digital form of a country’s official currency that is issued and regulated by its central bank. As the use of stablecoins (using a decentralised network for transactions and record keeping) has seen a significant surge in recent years, central banks have stepped up efforts to investigate the development of their own stablecoin digital currencies. More than 100 countries representing 90% of global GDP are exploring the benefits and risks of  CBDCs.

Central banks issue two types of central bank money: bank notes that can be used by anyone for daily transactions and central bank deposits used for large-value transactions mainly by commercial banks. In parallel with these two categories, CBDCs can be categorised into two types: Retail CBDC for general public everyday transactions and Wholesale CBDC intended for use among financial institutions and large corporations for interbank settlements and large transactions.

CBDCs differ from regular digital money because its’ a liability of the central bank and not a commercial bank. The argument is that CBDCs are more secure than independent stable coins that set up their own reserves that can be prone to failure due to liquidity issues or fraud, which is less likely to happen at a government’s central bank. See our recent article Stable (or not so stable) coins – The future of Fintech?

Central banks’ interest in CBDCs

Central banks’ interest in CBDCs is likely spurred by control/defensive factors such as i) declining cash usage, mainly in developed countries, which has forced central banks to reassess the role of cash in the monetary system. Further, as demand for cash weakens, issuing CBDC could ensure sovereign money continues to play its role in underpinning confidence in money ii) the impact of privately issued stable coins on traditional monetary policy. Stablecoins, Bitcoin and other first-generation crypto assets are inherently outside the scope of nation states and are not denominated by sovereign currency units. If these crypto currencies, are widely used in domestic transactions, the effectiveness of monetary and macro policies will be reduced substantially. Central banks cannot affect economic activities undertaken with crypto currencies, and iii) regulating payment network. CBDC’s could provide central banks an anchor for a greater local governance over increasingly global payment systems operated by Big Tech firms.

Opportunities for Fintechs

Retail CBDCs can be used by Fintechs to offer micropayment and peer-to-peer payment services.

CBDCs have the potential to facilitate faster and cheaper transactions, making them suitable for micropayments. With CBDCs, consumers and small businesses can make instant payments for goods and services of low value without incurring high transaction fees.

CBDCs also have the potential to streamline peer-to-peer transactions. By eliminating intermediaries, such as banks or payment processors, CBDCs can enable direct transfers between individuals. This can reduce transaction costs and enhance the speed and efficiency of peer-to-peer transactions. Consumers and small businesses can leverage CBDCs to facilitate direct payments between themselves and their customers or suppliers, eliminating unnecessary delays and costs associated with traditional payment methods.

Breaking down the benefits

1. Financial Inclusion: CBDCs can improve access to financial services for consumers and small businesses that may have limited access to traditional banking services. By providing a digital currency that is accessible through mobile devices, CBDCs can enable consumers to engage in digital transactions and access financial services more easily.
2. Reduced Transaction Costs: CBDCs can help reduce transaction costs associated with traditional banking systems. By eliminating the need for intermediaries, such as banks, CBDCs can facilitate peer-to-peer transactions, reducing fees and transaction times for entrepreneurs.
3. Enhanced Security: CBDCs can provide a more secure means of conducting transactions compared to traditional cash-based systems. The use of cryptographic technology and secure digital wallets can help protect consumers and small businesses from theft and fraud, ensuring the safety of their funds.
4. Improved Transparency: CBDCs can enhance transparency in financial transactions, making it easier for small businesses to track and monitor their business activities. The use of blockchain technology, which underlies many CBDC initiatives, allows for transparent and immutable records of transactions, enabling small businesses to maintain accurate financial records.
5. Access to International Markets: CBDCs can facilitate cross-border transactions and international trade for small businesses. By providing a digital currency that can be easily exchanged with other currencies, CBDCs can lower the barriers to entry for small businesses looking to engage in global commerce.
6. Financial Stability: CBDCs can contribute to financial stability by providing a more stable and reliable form of currency. In countries with high inflation rates or unstable local currencies, consumers and small businesses can benefit from the stability and credibility of a CBDC, reducing risks associated with currency fluctuations.

It’s worth noting that the specific use cases for technopreneurs using CBDCs may vary depending on the country’s regulations, technological infrastructure, and the design of the CBDC itself. As CBDCs are still in the early stages of development and implementation, it is important to stay updated on the latest developments and regulatory frameworks in your jurisdiction.