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The future of digital money

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By Marios Charalambides & Alexandros Vacanas

The launch of Bitcoin in 2008 and the blockchain technology behind it has unveiled to the world of finance a new revolutionary decentralised operating infrastructure.

The evolution of money, shifting in parallel with societal change, has reached a new age of digitalisation, with digital cryptocurrencies/assets replacing the use of fiat money dominant for the past 50 years.

Central Bank Digital Currencies (CBDCs) are among the most significant developments of this transformational progress that have surfaced in the past months.

Like other cryptocurrencies already in circulation, CBDC is a form of virtual money that uses blockchain technology to issue digital tokens to represent cash, which is issued and governed by Central Banks.

There are two choices of implementation models that are relevant to CBDCs – retail or wholesale.

Retail CBDC is a form of digital currency held and used by people and businesses, being an extension of cash.

In contrast, financial institutions can only use wholesale CBDCs in interbank exchange and capital markets.

Based on PwC’s recent Global CBDC Index 2021 (1st Edition) published in April 2021, retail CBDC initiatives are stronger in emerging economies where digitisation has a considerably higher impact.

The Bahamas, which ranks first globally, officially launched the Sand Dollar in October 2020, being the digital version of the Bahamian Dollar.

All citizens have access to their digital wallets through both a mobile application and physical payment cards.

The Sand Dollar enables the Central Bank of Bahamas to collect information on income and expenditure daily, providing additional support for micro-loans applications and strengthening their controls on Anti-Money Laundering (AML) and other illicit activities associated with physical cash.

While no wholesale projects have been launched yet, nearly 70% of declared projects are running pilots, while only 23% of retail projects have reached this implementation stage.

In 2019, the Hong-Kong Monetary Authority and the Bank of Thailand launched the Project Inthanon-LionRock to develop a software prototype to enable cross-border settlement in CBDC and explore a range of different use cases.

Whereas the wholesale structure is most evident in more advanced economies, the use of retail CBDCs is more likely to take centre stage for widespread adoption as users are not restricted to the permitted institutions.

The payments landscape has been altered dramatically, with the changes in technology and consumer preferences being the driving forces in this shift to electronic payments.

In their effort to respond and remain relevant in this environment, Central Banks are adapting their existing model and embedding this change with the future application of CBDCs.

There is an urgent need for a transition from a theoretical perspective to a more practical proposition.

This new financial ecosystem will facilitate the spread and adoption of digital money in the future, expand the current functionalities of the existing fiat currencies, and improve the efficiency of payments.

Marios Charalambides, Director, International Private Clients, Blockchain specialist, Alexandros Vacanas, Senior Associate PwC Cyprus