PowerPoint Presentation

[Audio] Lesson 3: Introduction to Central Bank Digital Currencies: The case for CBDCs, how they function, and their role in the global economy..

[Audio] Let's start with an overview and the objectives of this lesson. As technology rapidly advances, CBDCs have emerged as a groundbreaking innovation. They're not just a new type of money; they're a new way to think about money. They promise to reshape our understanding of money and play an influential role in the global financial ecosystem. Our objectives today are to: Understand the Basics: We'll grasp the fundamental principles behind CBDCs and how they differ from traditional currencies and other digital assets. Discover the Rationale: Why are central banks even considering digital currencies? We'll evaluate the forces and benefits propelling their development. Assess Global Impact: From cross-border transactions to financial inclusivity, we'll analyze CBDCs' potential role in reshaping the global economy. Central Bank Approaches: Using the digital euro as a case study, we'll understand how central banks are approaching the adoption of CBDCs..

[Audio] Moving on to the learning outcomes, by the end of this session, you will have gained: Fundamental Knowledge: A clear understanding of what CBDCs are and their distinction from other forms of digital currencies. Understanding the Origin: Insight into the reasons and primary incentives for the global emergence of CBDCs. Awareness of Broader Consequences: You'll be able to discern the extensive effects of CBDCs on the international financial domain. Practical Insight: With the digital euro as an example, you'll learn about the practical steps and challenges in CBDC development. Analytical Abilities: You will enhance your skills to critically evaluate the advantages and concerns surrounding CBDCs. Anticipating Future Trends: You'll be prepared to recognize and understand the revolutionary role CBDCs may play in finance, payment systems, and global commerce..

[Audio] Now, let's dive into what CBDCs are. They stand for "Central Bank Digital Currencies" and represent a new form of digital currency issued by central banks. These institutions are responsible for regulating a country's money supply and monetary policy. Traditionally, the public holds money either in physical form, like coins and banknotes distributed by central banks, or electronically, through accounts maintained with commercial banks. However, CBDCs are introducing a direct digital form of central bank money to the public..

[Audio] They are not to be confused with decentralized cryptocurrencies like Bitcoin or Ethereum. CBDCs are centralized and are a digital claim against the central bank that issues them. Various central banks around the world are exploring or piloting CBDCs, motivated by factors like the decline of cash usage and the rise of private digital currencies like Facebook's proposed Diem..

[Audio] Let's define CBDCs in detail. According to the EU Blockchain Observatory and Forum, a CBDC must fulfill two criteria: it should be digital and issued by a central bank. This isn't entirely new; commercial banks already hold digital reserves at central banks, which are considered digital representations of value and are liabilities of the central bank and assets for the commercial bank. CBDCs represent a significant step towards integrating digital innovation into the financial system, offering a blend of traditional banking stability and the advantages of digital technology..

[Audio] Continuing with our exploration of Central Bank Digital Currencies, we now come to the two models of CBDCs: wholesale and retail. Firstly, wholesale CBDCs. These are an expansion of the reserve model and include entities beyond commercial banks, used by these banks and central bank-appointed institutions. They facilitate major financial processes, such as payments, remittances, and settlement of financial instruments. Essentially, wholesale CBDCs are focused on improving the efficiency and security of high-value transactions and settlements between financial institutions. On the other hand, we have retail CBDCs. These function as legal tender and are the digital equivalent of the cash in your wallet. They fulfill all the classic functions of money: a medium of exchange, a store of value, and a unit of account. They are a liability of the central bank and an asset to you, the individual, as well as households and businesses. Retail CBDCs are focused on everyday use by the general public..

[Audio] Next, let's look at the Bank of International Settlement (BIS) Report from January 2020. About 10% of the central banks surveyed are likely to issue a CBDC for the general public in the short term, which could affect 20% of the world's population. Central banks are actively researching CBDCs, and although not widespread yet, we see a shift towards more experimentation and pilot programs. The motivations for researching and potentially adopting CBDCs vary. In emerging markets, the focus is on reducing the reliance on cash. In advanced economies, the intent is to address the issues the public might face in accessing central bank money. There's also an emphasis on the necessity for collaboration in understanding the impact of private digital tokens..

[Audio] However, many central banks are not yet analyzing the impact of these private digital tokens on monetary and financial stability, especially concerning stablecoins. There's a disparity between advanced economies and emerging markets in engagement with CBDC work, with a majority of advanced economies being more actively engaged..

[Audio] The likelihood of issuing CBDCs is increasing. Comparing survey results from 2018 to 2019, we see a shift in attitudes. More central banks are considering issuing a general-purpose CBDC in the short term, and there's also an increased likelihood of issuing wholesale CBDCs in the medium term..

[Audio] Now let's discuss how CBDCs could extend existing monetary practices into a digital format. These currencies would be issued and backed by the central bank, ensuring a claim against the bank and mitigating credit or liquidity risks. They present a transformative opportunity for central banks to maintain sovereignty over monetary policy in a digitizing world, may reduce costs for cross-border remittances, improve payment systems, and even potentially replace physical cash..

[Audio] Key issues surrounding CBDCs include payment efficiency, security, financial inclusion, sovereignty, and futureproofing economies. For instance, the 2019 ECB study showed a decrease in cash dominance and a rise in electronic payments. By 2030, mobile payments are expected to take the lead, highlighting the potential for CBDCs to bolster payment resilience and efficiency while addressing security and anonymity concerns..

[Audio] Cash still plays a major role in transactions. According to a 2019 ECB study, cash was involved in 73% of point of sale transactions and accounted for 48% of the total POS payment value. However, this is a decrease from 78% and 53%, respectively, in 2017. Electronic payment growth is substantial, with an 8% rise in the euro area from 2018 to 2019, amounting to €100 billion in volume and €160 trillion in value. Digital payment trends suggest mobile payments will be the most common form of payment by 2030. Companies like ACI Worldwide and Adyen are projecting significant increases in digital transaction volumes. For CBDCs, the potential lies in boosting payment resilience and efficiency. They are expected to address security, anti-money laundering, and offer potential cash-analog anonymity, reinforcing the safety of digital transactions..

[Audio] Financial inclusion is a crucial agenda for CBDCs. They are positioned as a pseudonymous or anonymous payment medium, which can be especially important as cash usage declines. The idea is to protect vulnerable populations and ensure nobody is deprived of economic access. Globally, there's a potential to serve approximately 1.7 billion unbanked individuals, of which 26% are in Europe. However, the infrastructure for digital devices and internet access is critical for the successful adoption of CBDCs..

[Audio] CBDCs also have implications for financial sovereignty. Central banks face challenges with monetary policy inefficiencies and rising competition from private sector alternatives, like cryptocurrencies and privately-issued digital assets. The landscape became more competitive after the 2008 financial crisis, which introduced tools like negative interest rates and quantitative easing. CBDCs could provide central banks with additional tools to facilitate monetary policy and address future crises..

[Audio] CBDCs represent adaptable infrastructure. They can adjust to future payment and finance trends, making them a resilient form of currency as we witness evolving economic behaviors and technologies. They are programmable money. This concept, nurtured in the decentralized space, allows for CBDC operations based on complex conditions, enhancing the flexibility of monetary policy and financial transactions. Furthermore, CBDCs provide convergence opportunities. They can easily interoperate with other digital systems, facilitating new forms of commerce like the Internet of Things and machine-to-machine transactions..

[Audio] Despite the optimism, CBDCs are not without their concerns. There are worries about financial stability, as CBDCs might lead to rapid shifts of deposits from banks in crises. Privacy is a significant issue. The centralization of CBDCs could mean increased surveillance and less financial privacy for individuals if central banks can access transaction data. Cybersecurity is another critical area. The digital nature of CBDCs could make them targets for cyber-attacks, threatening individual savings and broader financial stability. Economic policy effectiveness might also be impacted. Some argue CBDCs could limit the effectiveness of tools like negative interest rates. There's a possibility that CBDCs could marginalize traditional banking, affecting its profitability and role, especially in terms of lending and other bank functions. Lastly, the implementation and transition to CBDCs pose significant challenges, both technical and regulatory. And there are concerns about inequality if CBDCs are not designed to be inclusive, potentially excluding those without access to digital technology..

[Audio] As we look at the global landscape, we see a variety of statuses concerning CBDC development. Some countries are in the research phase, others are testing proofs of concept, and a few have moved to pilot programs or even launched their CBDCs. The variety in approaches reflects different economic needs, regulatory environments, and technological capabilities worldwide..

[Audio] A detailed view of the global landscape shows the specific projects and their statuses. The Digital Pound in the UK is in the research phase, as is mBridge in both the United Arab Emirates and Thailand. The Swiss National Bank and the Monetary Authority of Singapore are researching Project Mariana. On the other hand, Kazakhstan has moved to a proof of concept with the Digital Tenge, and India's pilot of the Digital Rupee is a significant step towards a potential widespread rollout..

[Audio] Let's delve into the specifics of the Digital Euro project. This project is the ECB's exploratory mission to potentially implement a Central Bank Digital Currency (CBDC) within the eurozone. The concept of the digital euro represents a significant stride towards integrating digital currency with the traditional financial system. The ECB has been proactive in this exploration. It has undertaken various pilot projects to assess the feasibility, benefits, and challenges associated with the introduction of a digital euro. These pilot projects are crucial for testing real-world applications and identifying any technical or policy-related hurdles that need to be addressed. Stakeholder involvement is a critical aspect of the Digital Euro project. The ECB has reached out to a wide array of participants, including the general public, financial institutions, and industry experts. This inclusive approach ensures that the ECB can gather extensive feedback and insights, which is vital for the thoughtful development of a CBDC that meets the needs and expectations of its potential users. The engagement with stakeholders not only helps in understanding the implications of introducing a digital euro but also in garnering support and building the necessary infrastructure for its potential rollout..

[Audio] And here's the projected timeline for the Digital Euro. From governance set-up to prototyping and decision-making, this timeline outlines the path towards potentially launching the digital euro, reflecting the ECB's careful and considered approach to this significant innovation..

[Audio] We're looking at the convergence process for a design decision on the Digital Euro. This complex process starts with input from various stakeholders, including the European Commission, the Market Advisory Groups, and the ECB's own committees. The pre-discussions involve the High-Level Task Force on Central Bank Digital Currency, where the design and core objectives of the digital euro are shaped. This is followed by an agreement on analysis at the same task force, ensuring that all technical and policy considerations are addressed. Then, we move into a broad consultation phase with various players in the ecosystem, from European institutions like the Commission and Parliament to payment industry representatives and other stakeholders. These consultations are vital in understanding the practical implications and expectations from the digital euro. The process culminates with a final decision by the Governing Council, which is the ultimate authority in determining the future of the digital euro..

[Audio] In October 2023, the European Central Bank made a significant announcement. It concluded the two-year investigation phase of the digital euro project and is now moving to the next phase. This next stage, set for another two years, has been rebranded from the "realisation phase" to the "preparation phase," indicating a shift towards more actionable steps. Ultimately, the launch decision for the digital euro will be made by the EU's main legislative bodies: the EU Parliament and the Council of the EU, which includes representatives from all member countries..

[Audio] Time to test what you have learned! We encourage you to take a moment, reflect to what you have already learned and think about the answers..

[Audio] As we wrap up, let's summarize the key points from today's session: Defining CBDCs: We've seen that CBDCs are much more than digital currencies; they represent an evolution in central bank money and have the potential to transform financial systems. Motivations Behind CBDCs: Central banks are motivated by the desire to modernize financial systems, enhance monetary policy, and combat emerging financial threats. Global Implications: CBDCs could significantly influence cross-border payments, improve financial inclusivity, and reshape global trade and economics. The Digital Euro Example: The ECB's thorough approach to the digital euro illustrates how nations are methodically exploring and potentially implementing CBDCs..

[Audio] Here are the references utilized throughout this lesson..

[Audio] We highly recommend reviewing these materials for a more thorough understanding..

[Audio] Additionally, please consider exploring additional resources for continued learning..

THANK YOU. Disclaimer: The content provided in this course is for informational purposes only and should not be considered as legal, financial, or professional advice. Acknowledgment: The content in this course has been developed as part of the TRUSTFOOD project, which has received funding from the European Union's Digital Europe Programme under Grant Agreement No. 101100804. Credits: Part of this is used under Creative Commons License / Part of the images provided in this presentation are created by DALL·E, an AI program developed by OpenAI, used for TRUSTFOOD project..