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CBDCs: The Next Evolution in Global Finance

Central Bank Digital Currencies (CBDCs) are digital representations of a country’s national currency that are issued and regulated by the central bank. These digital currencies are designed to provide a secure and efficient means of digital payment and are backed by the full faith and credit of the government. CBDCs are seen as a potential evolution of traditional fiat currencies in response to the digitization of financial systems and the rise of cryptocurrencies like Bitcoin.

There are several challenges, and each one needs careful consideration before a country launches a CBDC. Citizens could pull too much money out of banks at once by purchasing CBDCs, triggering a run on banks, affecting their ability to lend and sending a shock to interest rates. This is especially a problem for countries with unstable financial systems. CBDCs also carry operational risks, since they are vulnerable to cyber attacks and need to be made resilient against them. Finally, CBDCs require a complex regulatory framework including privacy, consumer protection, and anti-money laundering standards which need to be made more robust before adopting this technology.

Key points regarding CBDCs and their potential future:

Diverse Implementation: Different countries are exploring CBDCs, and the approaches vary. Some CBDCs are intended for retail use by the general public, while others are designed for wholesale use among financial institutions and banks.

Motivations: Central banks are considering CBDCs for various reasons, including improving payment systems, reducing the use of physical cash, enhancing financial inclusion, and providing a secure alternative to private cryptocurrencies.

Digital Transformation: CBDCs represent a step toward the digital transformation of financial systems. They could facilitate faster and cheaper cross-border payments, enable programmable money (smart contracts), and support financial innovations.

Financial Inclusion: CBDCs have the potential to improve financial inclusion by providing access to digital payment services for unbanked and underbanked populations. They can lower barriers to entry and reduce the need for traditional bank accounts.

Privacy and Security: The design of CBDCs raises important questions about privacy and security. Central banks must balance the need for transparency and security with individuals’ right to financial privacy.

Regulatory and Compliance Challenges: The implementation of CBDCs involves addressing regulatory and compliance challenges, including anti-money laundering (AML) and know-your-customer (KYC) requirements.

Interoperability: Achieving interoperability between CBDCs from different countries and with other payment systems will be a critical consideration for international transactions.

Impact on Banking: CBDCs could reshape the role of commercial banks in the financial system. They may need to adapt their business models and services in response to the changing landscape.

Digital Identity: Digital identity solutions are closely linked to CBDCs, as verifying the identity of users is crucial for preventing fraud and ensuring compliance.

Global Cooperation: International collaboration and coordination will be necessary to address the challenges and opportunities associated with CBDCs, especially in the context of cross-border payments and regulatory harmonization.

The future of CBDCs will likely depend on the decisions and strategies of individual central banks and the evolving needs of their economies. The adoption and success of CBDCs will also depend on public acceptance, technological advancements, and the ability to strike a balance between innovation and regulation.

CBDCs are a dynamic topic in the world of finance and are expected to continue evolving in the coming years.

In my opinion, we have an exciting world coming. There are many voices where I hear that CBDCs will be bad for human beings, but I believe that it is simply the evolution of state money, since technology does not stop.

Cryptoactives will also have their place and co-existence will advance towards a new world.

We cannot remain anchored in the Roman denarius, nor in the Spanish 8 real, and of course, nor in fiduciary currencies, such as the dollar and the euro, with no intrinsic value since the end of the gold standard. Now, there is a new world coming, and we are also part of the change, because it will affect us in our daily lives.

Jesús Sánchez-Bermejo