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Central Bank Digital Currency, Real Reasons to Be a Game Changer[Opinion]


Many countries around the world are piloting the Central Bank Digital Currency (CBDC). These efforts are sometimes told in the story of digitizing the money supply, which is a misunderstanding.

Already more than 90% of currencies are digital, and in most developed countries only 10% is physical cash.

Not only are most currencies already digital, most payments are also digital and are processed by bank transfers, credit cards, debit cards and more.

What is the value of Central Bank Digital Currency?

In fact, central banks in each country are investing heavily to further accelerate and streamline their digital payments process, a completely separate approach from their approach to tokenization and blockchain.

In the United States, the Federal Reserve will soon announce a new solution. It is “FedNow” that supports almost real-time digital payment in Japan. This will allow the United States to join many other countries that have developed and deployed similar infrastructure, such as the United Kingdom, Australia, Mexico and Nigeria.

If most currencies and payments are already digitized and many governments are investing in high-speed real-time payment systems, what is the value of central bank digital currencies using blockchain?

The answer is that it is programmable. Current payment systems operate independently of agreements in businesses that require payment. In other words, things are much more complicated and less reliable than when we focus solely on payments.


When you buy a soft drink at a store, you agree to exchange money for the product. Payments may be digital, but agreements are not. In the retail arena, there is no documented agreement. But in business, the agreement is mostly documented, making it clear that you will pay in exchange for goods and services.

Programmable digital tokens can be used to directly link the movement of financial assets to the performance of a particular business or the creation of a particular asset. As a result, the settlement between the parties concerned will be automatically performed. There remains fully integrated digital evidence of agreements, digital token creation of assets, and digital token payments.

Not only will it greatly simplify the execution of contracts in the business, but it will also give you a much better understanding of the risks in the economy. Smart contracts that combine financial assets with complex mechanics, such as crypto asset derivatives, allow regulators to see how much money is moving and simulate what happens in the event of significant price fluctuations. You can even do that.

DeFi is a precedent case

Tokenized and programmable fiat currencies bring great value to consumers, as most payments are made by consumers and not part of a contract (such as a mortgage or car loan). It may not be.

One obvious exception is in countries where there is little competition between payment systems. A central bank digital currency system accessible to all banks and retailers has the potential to offer significant cost savings. On the other hand, the central bank’s competition with the private sector needs to be carefully considered.

In business-to-business transactions, the value of central bank digital currencies seems to be far greater. But to be successful, central banks need to recognize a high level of programming potential. At least initially, you may not be happy.

Looking back at the early days of DeFi (decentralized finance), the early days of any programmable system were often during security testing. To be clear, many security flaws were found and mercilessly abused.

Programmability will be the greatest value and the greatest risk to the central bank, so its introduction will be very gradual.

Two options for realization

One option is to first roll out the Central Bank Digital Currency and then add programmability.

The second option is to allow experiments on the public blockchain and create a regulatory framework that allows banks and others to issue tokens backed by bank deposits.

Experiments with both options are currently underway and will require several years to fully evaluate the results.

With DeFi (decentralized finance) assets under custody (TVL) said to have exceeded $ 100 billion, one of these efforts can draw at least an early conclusion. This means that tech-savvy consumers are willing to bear part of the cost of providing technology without fear of hacking.

If the DeFi project can implement a privacy system, it will reveal how interested corporate users are in programmability and what security measures are needed to get them involved.

Paul Brody: EY (Ernst & Young) Global Blockchain Leader.

* The views are personal to the author and do not necessarily reflect the views of EY and its affiliates.

| Translation: Akiko Yamaguchi
| Editing: Takayuki Masuda, Shigeru Sato
| Image: Shutterstock
| Original: Why CBDCs Are Really Game-Changing

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