From cryptocurrency to CBDC

The traditional monetary and financial context was faced, just over 10 years ago, with the advent of Bitcoin, a peer-to-peer digital currency system in which the latter can be transferred without the intervention of an intermediary relying on a shared protocol between the network participants based on Distributed Ledger Technology (DLT) and Blockchain. Bitcoin has thus introduced an innovative ecosystem based on completely new logics, initiating the world of cryptocurrency and disintermediation by solving the problem of trust in the counterpart. The revolutionary features of the DLT allowed the birth of the token economy, based on the "tokenization" of physical or monetary assets, thus shifting part of the physical economy of the digital world through the Blockchain itself.

The idea behind cryptocurrencies, the creation of a private digital currency, has inevitably led the monetary context and financial institutions to perceive a potential threat to their business model: banks feel defrauded of their institutional role and total digitalization through cryptocurrencies is also perceived by institutions as a risk for clients.

For example, the advent of stablecoins, the cryptocurrencies that ontologically have the characteristic of price stability, has aroused great interest from the public, but many doubts on the governments and central banks side, this was clearly observed in particular when Facebook announced the project for a private stablecoin, the Libra Coin.

Central banks have therefore felt the need to explore innovative solutions to limit the loss of control of the system: their response to the rapid spread of these new innovative models lies in the introduction of the Central Bank Digital Currency (CBDC) concept, a new form of digital currency released by central banks as a complement or substitute for fiat currency. Many central banks are studying, and in many cases experimenting with, this kind of solution, the adoption of which may take place in the coming years with different timeframes and implementation models.

The CBDC is therefore a concrete response to the crypto wave. The interest of central banks in digital currency has therefore progressively increased in recent years, driven by the desire to secure control over the money supply, while offering a modern payment system that is part of the digitalization process that is spreading at all levels.

CBDC features

The CBDC is a new form of currency that allows anyone to make electronic payments using digital currency and can be classified into two categories depending on who has access to it: the wholesale CBDC, whose use is limited to financial institutions and the interbank market, or the retail CBDC, designed for universal use involving direct public access to central bank liabilities.

A CBDC thus combines the characteristics of a legal currency issued by a state or central bank with certain characteristics of cryptocurrencies.

Advantages and disadvantages

CBDC offer some positive aspects: efficiency, for the convenience and ease of payments similar to cash payments, accessibility, for ease of access by anyone who wants to use it, resilience, due to the redundancy of the technological infrastructure, especially in the case of decentralized architecture, and interoperability necessary for conversions to other CBDCs and international payments.

The CBDC also guarantees financial inclusion and some consumer protection: unlike banking liquidity and reserves, the retail CBDC gives central banks the role of trusted lender for households and small businesses. This means that in a potential financial crisis, central banks will be able to provide support directly to clients, ensuring greater financial stability. The latter is undoubtedly an indispensable dimension that the CBDC would ensure: a government-supported digital currency that is widespread in the domestic market limits the possibility of adopting private digital currencies as stablecoins that pose a risk in the financial and monetary domain.

While recognizing many advantages, one of the CBDC's weaknesses is its lack of anonymity, which can never be equivalent to cash or cryptocurrency anonymity.

CBDC and retail banks

The CBDC and its features are highly dependent on the real interests of consumers, so they must ensure an efficient and accessible system that can be a valid response to market demands. For this reason, the currency promoted by central banks must be a modern payment system that must be based on DLT and blockchain: the ease of money transfer without intermediaries and the low costs that they guarantee make its use indispensable. The issuance of digital currencies by central banks can have many advantages for users, but its impact on the banking system could be negative for retail banks: if consumers can hold money directly from the central bank, the function of retail banks would be at risk and this could cause the crisis of the traditional financial environment. The possible massive adoption of CBDCs would lead to a reduction of assets managed by retail banks, endangering the private credit system with potential consequences on business credit and therefore on employment.

For this reason, ongoing studies and experiments are mainly aimed at understanding the best way to implement CBDC to avoid the system destabilization but giving concrete benefits for consumers.