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10 CBDC myths debunked

Global Trends
6 Mins.

Central Bank Digital Currency (CBDC) is an exciting development within the payments industry, but as with any technological breakthrough, some myths are starting to emerge. Here we discuss 10 common misconceptions

Misconception 1: A CBDC is a cryptocurrency

A CBDC is a digital currency issued by a central bank, and  therefore has legal tender status. It has the same functions as physical money, so it can be thought of as a digital form of cash. In contrast, cryptocurrencies are community money. They are not backed by an official institution, so they are unregulated, with volatile value movements. Stablecoins, which are one type of cryptocurrency, are closely linked to a national currency or other assets to prevent exchange rate fluctuations, but providers are usually private companies with commercial interests.  

Misconception 2: Everyone will have bank accounts at central banks

There are various types of CBDC, from account-based to token-based concepts, and the extent to which central banks are involved in retail interactions varies. In most countries, the involvement of central banks will be minimal. Since commercial banks have existing relationships with consumers, they are the best players to distribute a CBDC; they provide existing apps that can be extended to utilize CBDC, and they have the know-how to manage Know Your Customer (KYC) processes. G+D’s approach, for example, stays close to today’s cash cycle. People's bank accounts remain where they are today – at the commercial bank.

Misconception 3: A CBDC is always based on blockchain technology

Blockchain is a great technology that works very well for certain use cases. However, because a CBDC is provided by a trusted institution, blockchain is not essential to its operation. CBDC projects in China and Sweden have not relied on blockchain, for example. While a number of design criteria for a CBDC can be met by blockchain and distributed ledger technology (DLT), G+D has identified a few that are more difficult to achieve. These include secure consecutive offline payments, the possibility to truly balance privacy versus transparency, and also ensuring highest resilience with no single point of failure in a CBDC ecosystem. G+D’s CBDC solution, Filia, has taken a different approach, as there was no technological solution in development that met all the needs of central banks.

Misconception 4: Every CBDC payment can be tracked

Today, digital payments always involve disclosing personal data to a payment services provider, a merchant, or both. A CBDC should allow complete anonymity up to a certain threshold – as is the case with cash. The possibility to truly balance privacy versus transparency was crucial to the development of Filia: it provides privacy to the user while still meeting the required compliance requirements of the central bank in order to prevent money laundering or tax evasion.

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Performing the same functions as physical cash, CBDC would make a significant contribution to digital financial inclusion

Misconception 5: A CBDC is a risk to monetary and financial stability

Introducing a CBDC for general purpose is a major undertaking, so in-depth analysis is needed to ensure there are no unintended consequences. To mitigate risks, a well-designed CBDC solution should imitate physical cash as closely as possible, ensuring that all players in the financial system keep their existing roles, and customer relationships remain undisrupted. For example, to avoid a drastic shift of deposit money to CBDC and therefore maintain financial stability, commercial banks could provide digital wallet and exchange services and the  amount of CBDC that could be held could be limited. CBDC solutions should give the private sector  options, such as having the ability to build interoperability with other technologies, to enable them to create innovative solutions for specific purposes.

“G+D's solutions Filia has been designed to be inclusive and accessible to all, just like physical cash but with the benefit of working digitally“

Misconception 6: A CBDC will leave unbanked people behind

About 30 %  of the gobal adult population is unbanked and cannot participate in the digital economy. That’s why  G+D's solutions Filia has been designed to be inclusive and accessible to all, just like physical cash. For example, barriers such as the need for a bank account or a device such as an expensive smartphone would no longer be required in order to participate in the digital economy, enabling even the poorest in society to use and benefit from a CBDC.

Misconception 7: People need an internet connection to pay with CBDC

As a CBDC is legal tender, payment must be guaranteed at any time – even in areas without a network or internet connection or electricity – e.g. when there is a power outage. G+D's solutions Filia enables consecutive offline payments to ensure digital payments can be made by everyone, everywhere, at any time.

Misconception 8: A CBDC is just another form of digital payment

Existing digital payment schemes either require a subscription and/or a bank account or credit card, or they impose fees. Furthermore, not all merchants accept payment by every type of digital service provider. In contrast, a CBDC would be an official legal tender with the same functions as physical money, backed by a central bank. It would be the first truly interoperable digital means of payment, meaning any merchant or person would accept it. It serves as unit of account to value goods and services, and is a store of value that can be saved, retrieved, and exchanged at a later time.

Misconception 9: A CBDC will replace cash

Cash continues to be used in 80% of all consumer payments globally. It has several unique characteristics, including being the only sovereign means of payment and making the user independent from the issuer. CBDC is therefore intended to complement rather than replace physical cash. Performing the same functions as physical cash, and with its own unique characteristics, CBDC would make a significant contribution to digital financial inclusion.

Misconception 10: There will be one CBDC for everyone

There is no one-size-fits-all CBDC solution. Central banks can tailor their own CBDC to their specific requirements, in the same way that different countries have different banknotes. For example, Japan must consider specific offline requirements to account for frequent earthquakes and power outages, while African Central Banks want to ensure digital payment for unbanked parts of society.

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