By Sofia Sadiq
ATM Industry Association
Editor's Note: [Editor's note: This article was originally published on Mon., Dec. 18, 2023, by the ATM Industry Association (ATMIA). Copyright (c) 2023 by ATMIA. Reprinted with permission.]
Central bank digital currencies, commonly known as CBDCs, represent a novel form of digital currency designed to supplant physical cash. It's crucial to differentiate digital currencies from cryptocurrencies, as the former, like stablecoins, are typically linked to an underlying asset, while the latter, such as bitcoin, rely on blockchain technology.
CBDCs, in essence, function precisely as their name suggests: they are a digital manifestation of currency issued and guaranteed by a central bank, maintained in a centralized ledger—a form of digital cash. The current spotlight on CBDCs is driven by a surge in global central banks exploring their implementation, with up to 86 percent of these institutions considering the development of their digital currencies. China has already conducted trials of CBDC in several cities, the European Central Bank anticipates deciding on the digital euro this summer, and the Federal Reserve Bank of Boston plans to unveil its preliminary research in the fall.
What prompts this sudden interest among central banks in launching digital currencies? Several factors explain this growing interest in launching digital currencies by central banks:
1. Monetary sovereignty: The rapid expansion of private payment networks raises concerns for central banks, as these networks could become dominant in transactions, potentially threatening their control over the global monetary system.
2. Financial stability: The failure of a private provider of digital cash could disrupt the payment system and destabilize the financial system. Central banks aim to mitigate this risk by issuing their own digital currencies, ensuring the reliability of the medium of exchange.
3. Financial inclusion: The rise of exclusive private money networks may exclude segments of the population, such as the unbanked. CBDCs, similar to physical cash, can promote broader availability and foster greater financial inclusion.
The question arises: How disruptive could CBDCs be? When a fundamental aspect of everyday transactions, such as purchasing a cup of coffee, undergoes change, the effects are likely to be profound.
For instance, commercial banks may face disintermediation, being excluded from transactions if consumers opt for non-banking entities. With the launch of a digital currency, consumers can transfer their bank deposits to CBDC accounts within central bank limits. The technological infrastructure of CBDCs could also facilitate the entry of new nonbank entities into the payment space, intensifying competitive pressures on commercial banks.
Another area of impact could be transaction data. A tug of war is expected between consumers desiring anonymity and innovative fintech companies creating incentives for users to adopt their platforms, generating valuable user transaction data. Fintech success could lead to a proliferation of network effects, enabling them to gain market share against traditional banks.
CBDCs might also disrupt the international payment system. A country with a widely accepted CBDC for international transactions could enjoy significant advantages in financing costs and control over financial transactions, akin to the privileged role of the U.S. dollar today. Central banks, such as the ECB and the People's Bank of China, view the shift to digital currency as an opportunity to elevate the international status of their respective currencies and share of cross-border payments.
While CBDC initiatives are not intentionally disruptive, their unintended consequences are poised to reshape the financial landscape. The pace of disruption will hinge on the rapid adoption of CBDCs, creating opportunities for innovation and increasing the potential for unintended consequences in the financial system.
The key distinction between CBDCs and existing electronic central bank money lies in accessibility. Existing electronic central bank money is exclusively available to financial institutions, such as direct participants in the payment system. In contrast, CBDCs would be accessible to businesses and individuals.
Central bank money, such as CBDCs, is considered a more secure form of currency compared to commercial bank money held in a bank account. This is attributed to the central bank's ability to create additional money as needed, in contrast to the risk of a commercial bank facing insolvency. 
Sofia Sadiq is the ATM Industry Association's international advocacy and content manager. For information about ATMIA, an independent, nonprofit trade association, and its mission, please visit www.atmia.com.
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