Central Bank Digital Currency – crypto vs digital currency

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With the continued rise of crypto and the global pandemic significantly accelerating our move towards a cashless society, is CBDC traditional banking’s response to the likes of Bitcoin or Ethereum and other cryptoassets?

There’s certainly split opinion.  A potential attraction to some cryptoassets is their (current!) regulation-free nature, making it significantly easier to transfer value globally or, as decentralised finance shows, earn a greater yield than monies with traditional institutions – however, this same trait makes them difficult to control, influence and predict, there are also more limited consumer protections.

CBDC on the other hand would be centralised, issued, and regulated by the UK’s monetary authority – the Bank of England. In this sense, CBDC aims to be the best of both worlds– it allows for speedy and efficient financial exchange, bypasses the risks associated with the unregulated sphere of cryptoassets, and its value would be pegged to the GBP and so would not fluctuate in value in the same way that certain cryptoassets can.

Whether a CBDC will be introduced in the UK is undecided. However, consumer desire for more efficient payment services is evident, the rise of stablecoins – a cryptoasset backed by real-world assets, which maintain a value – is a good example of this.

A CBDC should have more credibility than private and centrally-issued stablecoins which, whilst linked to the same fiat currency, may have more opaque systems of issuance making it difficult for consumers to have certainty that their digital funds are properly collateralised.

With a large majority of the world’s banks exploring digital currencies, and the emergence of real-world solutions, for example, the Central Bank of the Bahamas’s issuance of the “sand dollar”, CBDC will play an important part in the future of global. In the UK, with the House of Commons briefing paper released in April 2021, and a CBDC Taskforce in place to explore digital currency, the financial services sector could see rapid changes in the coming years. This innovation should drive a stable regulatory position in these areas.

If you have further questions on any of the above or would like to know more, our team will be happy to help.