Digital currencies may be closer than you think 

Digital innovation affects every part of the financial world, including the money we use every day.   Digital payments already are the leading way to pay for goods and services online. Systems like digital wallets allow consumers improved convenience, flexibility and security but can also carry their own risks.   

In a bid to address some of these risks and improve economic efficiency, monetary authorities of nearly all the world’s major economies – from Europe and North America to Africa, Asia and the Middle East – are exploring the development of central bank digital currencies.  

This revolutionary development may come into play sooner than you think. Two major CBDC initiatives, the digital euro from the European Central Bank and the Bank of England’s digital pound, could launch as early as 2027. The U.S. Federal Reserve also has begun preliminary work on a digital dollar, but that program will likely not progress until it receives congressional approval.  

“There are over 40 ongoing CBDC pilots around the world. Major economies covering most of the world’s GDP and most of the G20 are looking into this new form of money,” said Nabil Manji, head of fintech growth and financial partnerships at Worldpay. “This is the direction we seem to be heading.”  

A new digital cash 

Many CBDC pilot programs are focused on retail use. That means they’re targeted at the general public for everyday transactions among individuals and businesses. They can be used both online and in person.  

Think of a central bank digital currency as a digital form of cash. That is important because it means it’s a digital claim on a liability of a central bank, like the Bank of England, European Central Bank or Federal Reserve. That direct claim makes CBDCs fundamentally different from other electronic forms of money, like digital wallets, cryptocurrencies or online bank deposits by reducing financial risk for users. Money in other accounts, such as a digital wallet or bank, is as secure only as the institution that holds it.  

“If you keep some money in a digital wallet, what happens if that wallet goes out of business?” said Manji. “Is it covered by deposit insurance? If so, how much? Which bank does my money sit in?  

“We’ve seen this risk grow over the past few years, driven in part by the number of neobanks and e-wallets that have come into the market. Many of those neobanks and e-wallets are actually electronic money institutions, not banks, and so they are not covered by deposit insurance.” When some failed, their customers lost their money.  

Because CBDCs, by contrast, claim directly against central banks, money is as safe as the government that backs it.  

In addition, because they are issued by official monetary authorities, CBDCs can be designated as legal tender. That means merchants may be required to accept them as payment for goods or services. With digital wallets and other payment methods not designated as legal tender, merchants can select which payment methods to accept. 

More transparent transactions 

Beyond the consumer benefits, CBDCs also present an opportunity for more transparency in transactions. Under most existing monetary systems, money you might pay to a friend or a business, or money a business pays to another company or to an employee, doesn’t directly involve the governing monetary authority because the money was already held by intermediate financial institutions, e.g., banks with their own ledgering system. As a result, there’s no single “source of truth” to trace that money’s journey, and each step away from the currency’s issuing authority creates opportunity for further abuse and risk. 

With a central bank digital currency, every step in the chain of payments – top tier banks, and smaller banks, businesses and consumers – could be recorded directly on a single ledger.  

“That doesn’t mean everybody can just call the Bank of England if there’s a problem downloading a CBDC mobile application or wondering where your money is,” said Manji. “Monetary authorities will likely approve a limited number of banks or other third parties that can provide access for you, me and businesses to the ledger.  

“Once we have access, all of our transactions could post directly.”  

While physical cash and existing digital payment methods won’t disappear any time soon, the level of government involvement around the world on CBDCs means it’s possible to envision a future where digital currencies play a meaningful role in how we transact going forward.