Have you heard of this term: CBDC? If not, is a Central Bank Digital Currency. A “CBDC” is the digital form of a country’s fiat currency. It’s like cryptocurrencies; but issued, regulated and backed by the central bank of a country. They are also known as digital fiat currencies or digital base money.

The Bank of England was the pioneer to initiate a CBDC proposal; followed by China, Canada Uruguay, Thailand, Venezuela, Sweden, Singapore, Bahamas and India. From these, the only that is close to launching its own CBDC is China; it has suggested it is almost ready for launch, but no date has been set. In short: there are not any yet.

The idea of the central banks’ authority is that it will work like banknotes: it will have a unique number (distinguishable) and will be a form of payment. However, what they want to launch is a non-anonymous CBDC, that allows tracking transactions.

The causes to do it: cross-border payments are often slow and costly. They rely on correspondent banking which has counterparty risk, inefficient liquidity management, and bulky reconciliation.

Pros: payment process cheaper, faster, and safer; it will enhance market efficiency. It also will improve financial inclusion (unbanked citizens), support digitalization and replace physical cash, which will help to combat illegal activities.

Cons: Central banks’ business model will have to change. They will face to handle public complaints, user inquiries, put in place anti-money laundering controls such as “know your customer”, among others. Will this increase operating costs?

CBDC’s forecast is that it will be developed in 2-3 years. However, Facebook Libra cryptocurrency project is putting pressure on monetary authorities.

According to all these, CBDC will have the benefit of the cryptocurrencies: easy, fast and secure to operate. And from the traditional banking system: issued, regulated and backed by the authority.  A merge that in theory looks good… but challenge us to think if we are ready for a Central Bank Digital Currency.

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By Mónica Ramírez Chimal, Partner of Asserto RSC, Mexico City