New Frontiers: Central Banks Pursue Digital Currencies

What You Need to Know

Major central banks are exploring digital currencies, which seem likely to become a mainstay of tomorrow’s economy. As policymakers wrestle with the many moving parts of digital dollars, euros and yuan, their decisions will shape the next dimension in national currency—and could reshuffle international currency leadership.

Many aspects of the global financial system are already highly digitized, and the popularity of digital currencies is soaring. It was only a matter of time, then, before central banks got into the game. While the adoption of central bank digital currency isn’t widespread yet, many central banks are taking a close look—and some are much farther down the road to adoption than others.

But if the footprints of cryptocurrencies are dwarfed by the massive size of traditional national currencies, are digital national currencies worth the effort?

Central bankers believe that they are. They realize that digital currency demand will continue to grow, especially with younger consumers embracing the move to a largely cashless society. By developing a CBDC, a central bank would be ready to meet tomorrow’s society on its own terms—and keep a firmer grip on an increasingly digitized economy.

CBDCs offer a lot of promise. Implemented effectively, they could streamline electronic payments, make cross-border payments faster and more secure, and help underbanked communities access the financial system. CBDCs would facilitate digital commerce within the existing system, giving central banks an alternative to watching a growing share of economic activity move off its radar screen.

Fiscal and monetary policy effectiveness and efficiency would get a boost too, ironing out some of the wrinkles revealed during the COVID-19 pandemic. In the early days of stimulus payments, some citizens received direct deposits almost immediately; others, without access to accounts at commercial banks, suffered from delays caused by misaddressed payments or from limited access to their funds in a world that made face-to-face transactions largely impossible.

Read the whitepaper here.

Authors
Eric Winograd
Senior Economist—Fixed Income

Past performance, historical and current analyses, and expectations do not guarantee future results.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

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