When I visit shops, I usually pay for things with my bank card or Google Pay wallet on my mobile. Basically, in every transaction, from bills to shopping online, I do the same. Because it is easy and convenient to use here in Finland and other countries, all I need to do is just swipe my card or wallet instead of withdrawing physical cash from ATMs and carrying it with me, which I often have to do back in my home where sellers normally do not accept card payments. Transactions in cash are still widespread there. Also, many people hold the perception that paying with a bank card could give one’s card information to sellers who in turn could withdraw money without one’s knowledge. However, in other (developed) countries, widespread card payments are at our fingertips. When recalling the last time I withdrew cash from an ATM, I remember withdrawing a 20 Euro banknote from ATM to pay the seller 5 euros cash who for some reasons does not accept card payments. Before going any further on, let me ask a question – whether the money that I withdraw from an ATM in the form of cash and the money that I have in my bank account in electronic form are identical or not?

Before I started researching central bank digital currency (CBDC), which seems an interesting research topic, it was not very clear to me whether there are any thin lines that distinguish physical cash from electronic forms of money (i.e., electronic bank deposit). To start with the basics of money, physical notes and coins are central bank money, whereas money deposited in a bank account that we use to pay electronically either through online transfers or debit/credit cards is commercial (or private) bank’s money. In this case, the central bank provides paper money (banknotes and coins) to the general public. Private banks provide electronic bank deposit to the public that is accessible to us through a debit/credit card. However, it seems that we consumers hardly recognise these subtle differences because cash and bank deposits are swapped simply (they are perfect substitutes: 1:1). That is, we can withdraw cash from ATMs from our bank account held in a private bank. Unlike private banks which hold electronic reserve accounts with the central bank, the central bank, in the current monetary arrangement, does not provide electronic money (e.g., demand deposits, debit/credit cards, etc.) to the public. But there is a need for central banks to consider and issue electronic money to the public in addition to what it usually does: printing physical notes and coins.

However, the need to consider and issue electronic (or digital) money in the form of CBDC has become urgent for central banks, say, in the last 5 years, with the growth of private digital currencies (e.g., bitcoin) coupled with rapid digitalisation movement that is disrupting the monetary space in unpredictable ways. With the birth of bitcoin in 2008, cryptocurrencies and other digital currencies with their enormous variety have gained popularity all over the world. Notable examples include countries like EI Salvador that has made Bitcoin a legal tender in its jurisdiction. Tesla made a public disclosure in 2021 about making an investment of 1.5 billion USD in Bitcoin and accepting it as a means of future payment trail. And finally, Facebook launched its own stablecoin, Diem (formerly Libra), in 2022 and that can be used for payments.

The above shows some highlights of the private digital currency movement in which money and payments are becoming increasingly digital, on one hand. On the other hand, in many developed societies, cash is of little use nowadays, for example, in Sweden where less than 10% of transactions are done with cash. Given the decline in the use of cash and further growth of private digital currencies, there comes a risk that the public will no longer have access to, or be able to pay with central bank money (e.g., cash) in the future. This makes central banks to rethink their traditional monetary role and sovereignty. Because in an environment with a steady pace of digitalisation in the monetary system, if only private money becomes the norm in the digital age, what would public money do? This leads central banks to consider digital money to be issued to the public as a digital version of physical fiat money – which is called the central bank digital currency (CBDC). In addition, many central banks around the world have taken initiatives to encourage people to make cashless transactions in an effort to promote digital money usage in the society. Indeed, digital money has significant advantages over its physical counterpart in terms of implementing policy goals and social welfare: financial inclusion, efficient financial services to the public, and preventing money laundering, tax evasion, and other criminal financing.

As digital money is gaining momentum, many countries have already started exploring a potential CBDC in their jurisdictions. For example, in 2020, Bahamas, the first country in the world, launched its own CBDC, the Sand Dollar. China started experimenting with its e-CNY tests already in 2020 in some regions and later extended them to other regions. The Riksbank in Sweden has been actively developing its e-Krona project and plans to make trials in 2023. Moreover, it appears that more than 119 countries – representing over 90% of the global GDP – have taken research and development initiatives in exploring a possible CBDC. Now it looks more like a reality that more and more countries in the following years will join the CBDC race. And eventually, as progress continues, countries across the world issue a digital version of their national currency to the public that complements cash and is used widely.

Sultan Islam
Doctoral student
School of Accounting and Finance
University of Vaasa