Updated: May 31
Download the full report
Everyone is talking about it, but in concrete terms: what can we do with a Central Bank Digital Currency (CBDC)? In our last Thought Leadership, we present 10 in-depth fascinating use cases (+1 bonus country-specific) for the present and the future of finance.
A Central Bank Digital Currency (CBDC) is a digital form of money issued directly by a central bank and so it offers enhanced trust, security, and stability compared to traditional bank deposits. The Bank for International Settlements (BIS) defines CBDCs as digital liabilities of central banks that serve as mediums of exchange, units of account, and stores of value. CBDCs can be used for various transactions, from everyday shopping to more complex financial activities.
CBDCs can be categorized into retail and wholesale types. Retail CBDCs serve as a digital form of cash for the public, with objectives ranging from financial inclusion to cross-border payments. Wholesale CBDCs, designed for financial institutions and central banks, facilitate interbank transactions and large-scale financial operations. Modern discussions around wholesale CBDCs focus on adapting existing infrastructures to accommodate emerging technologies, like distributed ledger technology (DLT), with considerations of efficiency, security, and potential drawbacks like energy consumption and scalability.
Currently, according to the think tank Atlantic Council, 11 countries have launched some form of CBDC, and 114 countries are exploring CBDCs, a significant rise from 35 countries in May 2020. All G7 economies are developing a CBDC, and 18 countries in the G20 are in an advanced stage of development. Highlighting the potential of CBDCs, a variety of use cases are explored, gauging their potential to add value, spur innovation in financial transactions, improve efficiency, and promote financial inclusion. This exploration is ongoing, with countries considering applications that align with their unique economic, social, and environmental contexts.
Yet, the value or even the relevance of a CBDC remains a subject of debate (see these mainstream articles in The Economist and La Presse). Certainly, the potential value-added of CBDCs must be weighted against alternative technologies and innovations. Moreover, each country’s design of a CBDC must address complex issues around data privacy, security and offline, to name only these. As the digitalisation of the economies and everyday lives becomes more ubiquitous, as we no longer distinguish between web2 and web3, digital currencies, whether issued by a central bank or not, will be essential to all forms of transactions. It is hence not surprising to see multiple countries at varying stages of exploration.
The current paper presents ten potential applications for which CBDCs could address shortfalls of current monetary or financial infrastructure, highlighting how they can enhance different types of transactions. While this list is not exhaustive, these use cases exhibit the capacity for CBDCs to add value, innovation to financial transactions, enhance efficiency, and foster greater financial inclusion.
Use Case #1: Retail CBDCs present a promising opportunity in retail payments, potentially reducing transaction costs and improving efficiency, particularly for cross-border payments. With advanced technologies like DLT or blockchain, CBDCs could streamline both in-store and online shopping experiences. Pilot projects, such as those by the Riksbank in Sweden, are underway to assess the practicality and performance of CBDCs in these contexts. Read more in our full report.
Use Case #2: Peer-to-Peer Similarly, CBDCs might streamline P2P transactions, bypassing traditional intermediaries, reducing fees, and enhancing speed and security. Pilot projects, such as the Bahamas' Sand Dollar and India's e-rupee, have begun exploring the practicalities and potential benefits of CBDCs for P2P exchanges, showing promising early results. Read more in our full report.
Use Case #3: Business-to-Business Also, CBDCs could significantly enhance B2B payments, addressing the need for fast, fraud-free, and low-fee transactions. They could expedite payment processing, increase security, and reduce costs by eliminating intermediaries. Moreover, the programmability of CBDCs offers potential for automating specific transaction elements with smart contracts. Read more in our full report.
Use Case #4: Government-to-Person For Government-to-Person (G2P) payments, CBDCs could provide a more efficient and transparent method for transactions such as social benefits and wages. CBDCs can bypass intermediaries and reduce transaction times, while blockchain technology offers a tamper-proof ledger for added transparency and fraud prevention. A notable application is China's 2023 pilot project to pay public sector salaries in digital Yuan in Changshu. Read more in our full report.
Use Case #5: Cross-Border Transactions Pioneering projects like Dunbar, mBridge, Jura, and Icebreaker investigates the potential of CBDCs to significantly improve the efficiency and cost of international remittances and cross-border transactions. By fostering collaboration between central banks and international organizations, these initiatives are exploring an interoperable global CBDC ecosystem that could improve international transfers, with a potential to lower costs to less than 1 percent. Read more in our full report.
Use Case #6: Micropayments CBDCs could transform micropayments, facilitating low-value transactions efficiently in digital realms. Traditional payment systems are ill-suited for micropayments due to high fees relative to transaction values. In contrast, CBDCs enable instant, secure, and cost-effective transactions, paving the way for new revenue streams and business models. Read more in our full report.
Use Case #7: Automated Payments Regarding the Internet of Things (IoT) ecosystem, CBDCs can enable secure and instantaneous transactions, and might empower IoT devices to conduct payments autonomously. Central banks can explore this potential through pilot projects in collaboration with technology companies, device manufacturers, and service providers. These pilots would develop the necessary infrastructure and APIs to facilitate CBDC transactions between IoT devices, ensuring efficiency, security, and effectiveness. Read more in our full report.
Use Case #8: Crisis Response Government-to-person (G2P) payments in emergencies is another interesting CBDC use case by ensuring efficient and secure distribution of financial assistance. CBDCs enable instant transfers to eligible households, reducing reliance on physical checks. Real-time tracking and smart contracts add transparency and accountability to aid funds, minimizing corruption risks. Read more in our full report.
Use Case #9: Virtual Economies CBDCs offer efficient and secure payments in the metaverse. They address the limitations of traditional methods and provide a widely accepted and interoperable solution. Collaboration among central banks, metaverse providers, and stakeholders is key to developing integrated infrastructure. Bank Indonesia's adoption of CBDC for the metaverse is a notable example. Central banks can conduct pilots with metaverse providers to test CBDCs and create a seamless payment experience in the metaverse. Read more in our full report.
Use Case #10: Offline Payments CBDCs could offer offline payment functionality for secure and convenient transactions in non-connected settings. Central banks worldwide are exploring technologies like near-field communication and cryptographic protocols to enable offline CBDC transactions. Initiatives by the Bank of Canada, Reserve Bank of India, Bank of Japan, Central Bank of Nigeria, and People's Bank of China highlight the importance of financial inclusion and resilience in emergencies and areas with limited connectivity. Read more in our full report.
Country specific Use Cases: The Pilot Projects in Australia
As demonstrated through the numerous research projects, pilots and deployments of CBDCs involve more than technology and require that both local and international contexts be taken into consideration. Similarly, use case applications may be tailored to the economic, social, and environmental particularities and goals of a country. For example, the Reserve Bank of Australia (RBA) is conducting pilot projects to test the feasibility and benefits of CBDCs in different contexts. Some of the selected use cases include nature-based asset trading, GST automation, CBDC custodial models, livestock auctions, interoperable CBDC for web3 commerce, and tokenized bills, among others. These pilots aim to enhance trading efficiency, streamline tax collection, improve custody models, automate payment processes, enable cross-border transactions, and enhance invoice financing. However, as a digital form of money, the interoperability of CBDCs will be essential such that participation in multi-country initiatives will also be. Read more in our full report.
Would you like to know more? Much more details and information are available in our full report below.
Download the full report