the evolution of fiat money

At least 64 central banks are exploring digital retail currencies, 20 of which have been launched, tested, or are in advanced exploration.

The central bank’s digital currency (CBDC) is essentially a virtual token that is equivalent to a country’s existing fiat currency.

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The advantage of a digital currency transaction is that it is often faster than a traditional bank transfer because there are no middlemen.

This means that users can transact across international borders without paying outrageous fees or waiting days for money to reach its destination.

Retail and Wholesale CBDC

A retail CBDC would be like a digital version of money that is universally accessible, including through wallets on phones or specially designed devices like smart cards.

There could also be wholesale CBDCs, which, like settlement accounts with central banks, would only be accessible to a smaller number of participants.

Like cash and settlement account balances, the CBDC’s unit of account would be sovereign currency (also known as fiat money).

The CBDC would be convertible at par (i.e. one to one) with other forms of currency, and would also be specified to serve as legal tender.

A real field of innovation

The CBDC wouldn’t make much of a difference at the wholesale level, given that the money in this segment is mostly digital.

“The new technology does not fundamentally change the nature of the asset, because it is already digital, but allows banks to use it more efficiently and at a lower cost,” says Eswar S Prasad in The Future of Money – How the Digital Revolution is Transforming Currencies and Finance.

The real ground for innovation is the retail segment where a significant portion of the money is still in cash.

Retail CBDCs will be a digital currency issued by the central bank that will coexist with physical cash.

A Bank of England discussion paper notes that the retail CBDC would be “denominated in pounds sterling, just like banknotes.”

Minimize risks in the financial system

CBDCs are different in that the payment infrastructure is created and managed by the central bank, and payments are made using central bank money and not money created by the banking system.

CBDCs have strategic advantages from a central bank perspective.

Dr Priyadarshini and Sabyasachi Kar noted in a working paper titled “Central Bank Digital Currency: Critical Issues and Indian Perspective”: “China, for example, has seen near-universal adoption of digital payments, with almost 94 % of mobile transactions supported by Tencent or Alibaba.

“The two entities have also combined several other financial services with their social media applications. “

This level of dependence increases the overall risk of the financial system, as the entire digital payment infrastructure is dominated by a few private companies.

As Priyadarshini and Kar write, this poses risks of “monopolies, high barriers to entry, potential misuse of data, safety and security of technology.”

Central Banks Explore Retail CBDCs

According to, at least 64 central banks are exploring retail CBDCs, of which 20 have been launched or tested or are in very advanced stages of exploration.

Six jurisdictions have either fully launched (Bahamas) or launched pilot programs (China, Eastern Caribbean Central Bank, Nigeria, Jamaica and Uruguay).

Fourteen jurisdictions are at an advanced stage of retail CBDC research, six of which have started or will soon begin proof of concept (Bhutan, Ghana, Japan, Korea, Sweden and Ukraine).

For emerging economies, some of the main motivations for launching or testing a retail CBDC are the efficiency of the payment system and financial inclusion, including reducing the costs of handling physical cash.

Protecting monetary sovereignty and tackling the encroachment of private digital currencies are also important goals of emerging and advanced economies.

RBA’s work on CBDC

Given the possibility that the balance could shift towards a case of retail CBDC issuance, the RBA has stepped up its research on CBDCs.

In his speech to the Australian Corporate Treasury Association in November 2021, Tony Richards, RBA’s Head of Payments Policy, noted that ‘Supporting the evolution of payments’ is one of the six strategic focus areas of the RBA. RBA’s strategic plan, and that CBDC research is a key element of that.

The RBA seeks to experiment around retail CBDCs and engages with the new Center for Cooperative Digital Finance Research (CRC) on possible projects; the RBA is one of the 29 founding entities that will work through the CRC to explore the opportunities arising from the digitization of assets.

When it comes to wholesale CBDCs, the RBA has been researching the technological and policy implications for several years, assuming that it was more likely that an emission case could emerge.

RBA’s first project, completed in 2019 in collaboration with its in-house innovation lab, developed a proof of concept of an interbank payment system based on DLT (distributed ledger technology) using a tokenized form of CBDC backed by balances of exchange settlement accounts held at RBA.

Dunbar Project

Currently, RBA is working on the Dunbar project, in collaboration with the BIS Innovation Hub and the central banks of Malaysia, Singapore and South Africa.

This project aims to develop prototypes of shared platforms for cross-border transactions using CBDCs from many different jurisdictions.

Such platforms could allow financial institutions to deal directly with each other in CBDCs, thereby eliminating the need for intermediaries and potentially improving the speed, cost and transparency of wholesale cross-border transactions.

Sylvia B. Polson