The Current State Of The CBDC Space

Originally published by Futurum / Ripple.

Digital transformation and disruption, particularly in the financial sector, has accelerated at a speed not seen before over the last decade. We have seen new players emerge to disrupt parts of the stack, like PayPal and Stripe, as well as whole new technology platforms emerge, such as blockchain and distributed ledger technologies.

One area where the pace of change has been most pronounced has been the tokenization of everything — from art with NFTs to property ownership and, perhaps most crucially, with the advent of digital forms of currency, tokens or digital assets, can be considered the avatars of the Internet of Value. When value is represented in a token, translating to the depiction of value on a blockchain, the value can inherit new capabilities. The most important of these are transparency, privacy, and agility. Here’s a look at the role each plays:

• Transparency: Everyone can see the genesis of the asset through its transfer of ownership

• Privacy: Assets can transfer ownership peer-to-peer without the need for trusted intermediaries

• Agility: Through decentralized networks the flow of value can happen instantly which can unlock new models

These tokens also enable multiple different capabilities, such as the ability to send it, exchange it, lend it, borrow it, leverage it for collateral, fractionalize it, aggregate it, track it, validate it, activate it, share it, reward it, vote with it, and more. Literally anywhere in the world with a connection to the internet it’s possible to transfer value through tokenized assets, manually or programmatically, 24/7/365. Markets are never closed, and there is no longer such a thing as ‘bankers hours’ dictating when business can be transacted.

The World Economic Forum projects that 10% of the world’s GDP will be tokenized by 2027. This trend will profoundly impact everyone: businesses, governments, and individuals, on levels and in ways we cannot predict at this point in the evolutionary cycle of the technology.

Whether we realize it or not, we all know and have used a country’s fiat currency. Fiat money is a government issued currency that is not backed by a physical commodity, such as gold, but rather by the government that issued it. As fiat currencies look to evolve and keep up, central banks are looking toward tokenization. Consensus estimates are that 80% of central banks around the world are exploring the use of what is known as a Central Bank Digital Currency (CBDC).

A CBDC is a token issued on a blockchain that represents a country’s national fiat currency. The reasons why central banks are looking to transition to a fundamentally different approach to their currency include:

Financial Inclusion — CBDCs could be distributed to any citizen that has internet access through a computer, tablet, or smartphone. They provide a way of significantly increasing financial inclusion, for example making stimulus payments speedier and also more widely distributed.

Security — CBDCs can be managed on a government-run blockchain and, as such, can provide new, previously unavailable security features that can be extremely helpful including preventing fraud and money laundering.

Programmable Money — CBDCs can be programmed and can support innovative use cases such as micropayments for utility bills that pay on a per-use basis. This may become more prevalent with the transition to different forms of energy generation, transmission, and as consumption begins to take hold in the future.

Cross-Border Payments — CBDCs leverage the same underlying technology that drives digital assets like public crypto currencies. They can be used for cross-border payments with less friction and cost compared to traditional solutions.

Monetary Policy — CBDCs are attractive because they can be easily managed and can support strong and swift implementations of various monetary policies. Given the numerous benefits outlined above to CBDC adoption, it is not surprising that nations worldwide are considering how to roll out CBDCs, although challenges to adoption exist.