CBDCs aren’t new. What’s new is the fact that they can now quickly establish themselves.

Misconception #2: CBDCs Will Massively Disrupt the Banking System

Central banks no longer allow retail deposits because doing so disrupted the outside banking system and the overall financial system. For this reason, we believe central banks will only allow functionality to the extent that it does not disintermediate the private sector or other outside players. With that said, CBDCs will likely place significant competitive pressure on areas where governments see the industry’s products as a public good, such as payments.

Misconception #3: CBDCs Will Make Private-Payment Systems Redundant

As noted above, we think policymakers will be careful not to cause too much disruption with the introduction of CBDCs. After all, their main role is to preserve stability and protect the financial sector itself. In our view, most payments in the economy, whether in China or in the West, will remain digital and electronic, but will involve private money such as bank deposits or Alipay,⁴ rather than CBDCs.

Misconception #4: CBDCs Will Be Extremely Functional and Complex

It is exciting to think about the possibilities for CBDCs to transform macro policy. And it may be scary to think about the possibilities for governments to track every single transaction a person makes. But it is important to remember that with every new functionality for a CBDC, there is also a new cost. In our view, this means central banks will be very careful to make sure the public will accept the currency. We believe this means, for example, ensuring that below a certain denomination all transactions will be anonymous, just as with cash. Notably, however, in economies where most transactions are digital already, users have very little anonymity when it comes to their purchasing behavior.

Misconception #5: CBDCs Will Upend the Existing Dollar Reserve System

We believe it’s unlikely that CBDCs in and of themselves will disrupt the existing international financial system. However, we do think they could be one of several factors (including economic and geopolitical fragmentation and the rise of unorthodox monetary policy in developed countries) that together could precipitate the biggest changes in international financial architecture since the end of World War II.

We don’t believe CBDCs will be a significant threat to traditional financial institutions or systems.

Recent Developments in Central Bank Digital Currencies

China’s CBDC project, which started in 2014 with a 10-year implementation time frame, has been in testing phases for more than a year. It’s available in increasing numbers of cities and also internationally, via agreements with the authorities of Thailand and the United Arab Emirates. The currency will likely remain in trial mode for at least several years, until policymakers are satisfied with the currency’s functionality or if other countries’ currency debuts put increased urgency on the plan.⁵

Recently, the Biden administration in the US, along with the US Federal Reserve, appear to be taking the topic more seriously.⁶ Notable developments elsewhere in the world include Sweden’s e-krona project and Switzerland’s Project Helvetia.⁷

Bottom Line: CBDC Investment Implications

In our view, CBDCs will be positive for financial-system development and could be a very useful tool for fintech. In addition, we think the ease of transactions could push liquidity into scarce assets (e.g., gold, crypto). However, we don’t believe they will be a significant threat to traditional financial institutions or systems, though they could be sources of competitive pressure in some areas, such as payments. 

Critically, we think CBDCs will increase in relevance and prevalence in the years to come and the above misconceptions are likely to be dispelled along the way.