The digital currency revolution: Why central banks are embracing CBDCs

Why are the world’s central banks going for CBDC?

As countries become more digital, central banks are starting to invest, and in many cases even launching or testing, their own digital versions of paper money, called Central Bank Digital Currencies, or CBDCs.

Why would a government opt for CBDC? The reason is that some central banks are looking to advance and promote digital payments that allow for 24/7 payment processing. Some countries are upgrading their banking infrastructure to allow for real-time payments, but CBDCs are another way to for enable faster transactions during more times of the day.

CBDCs also provide a way to lessen the inefficiencies of printing and moving money, the cost of managing physical cash can be as much as 1.5% of a country’s GDP. As connectivity increases and smartphones thrive, CBDCs could also be a way to include more people in the digital economy who are currently shut off from basic financial services.

CBDCs have the potential to help improve the efficiency of cross-border payment services. The reason, cross-border payments tend to show challenges such as varying data formats and operating rules across regions and complex compliance checks. CBDCs that address such ineffectiveness could substantially cut transaction costs. Many countries have already introduced cross-border technology platforms to focus on these issues and promote digital currency payments between countries. One example is the Buna cross-border payment system, created by the Arab Monetary Fund in 2020.

According to the IMF, close to two-thirds of countries in the Middle East and Central Asia are looking to adopt a CBDC to promote financial inclusion and improve the efficiency of cross-border payments.

In fact, a total of 134 countries representing 98% of the global economy are now exploring digital versions of their currencies, with over half in advanced development, pilot or launch stages, according to a study by the US-based Atlantic Council think tank. According to Bloomberg, last year, German state-owned development bank Kreditanstalt fuer Wiederaufbau was preparing to issue its first blockchain-based digital bond in the form of a crypto security.

CBDCs can advance financial inclusion by fostering competition in the payments market and allowing for transactions to be settled more directly and with less intermediation, in turn lowering the cost of financial services and making them more accessible. Unlike commercial banks, central banks can also help keep costs lower as they aren’t concerned with making a profit. Similarly, the resulting increased competition in the payments market from a CBDC could also encourage upgrading technology platforms and the efficiency of payment services, helping financial services reach more people.

As per Juniper Research, by 2031, the number of global payments made using CBDCs will touch 7.8 B, up from 307.1 M in 2024. This 2,430% growth will be driven by central banks seeking to safeguard monetary sovereignty in the face of card-network dominance and growing stablecoin popularity. Collaborative projects such as mBridge and Project Icebreaker, which seek to connect national CBDCs, will leave nations less reliant on established payment rails.

Through the use of CBDCs and stablecoins, cross-border payments is predicted to save US$45 B by 2031, because currently high fees and limited visibility burdens remittance senders and global businesses right now. CBDCs and stablecoins streamline transfers by bypassing costly intermediaries, enabling direct transactions on decentralized or central bank-controlled networks.

“Emerging payment technologies, like CBDCs and stablecoins, will streamline international payments. These innovative technologies will help grow the digital economy and increase global financial inclusion by reducing the reliance on the US dollar for international settlements”. — Research author Lorien Carter

Research author Lorien Carter says, “Emerging payment technologies, like CBDCs and stablecoins, will streamline international payments. These innovative technologies will help grow the digital economy and increase global financial inclusion by reducing the reliance on the US dollar for international settlements”.

Going forward, interoperability between different CBDCs will become essential. CBDC vendors must participate in projects pioneered by global organizations such as BIS, allowing them to test their infrastructure and contribute to the design of multilateral interoperability standards. Without this collaboration, the CBDC ecosystem risks fragmentation, resulting in ‘digital islands’ which fail to realize the efficiency of cross-border payments.

By reducing reliance on cash, lowering transaction costs, and streamlining cross-border payments, CBDCs have the potential to reshape the global economy. However, for CBDCs to succeed, interoperability and collaboration will be key to avoiding fragmentation.

As adoption accelerates, governments and financial institutions must ensure robust infrastructure, security, and regulatory frameworks. With rapid advancements and growing global interest, CBDCs are poised to redefine the future of money, transforming how transactions are conducted worldwide.

Navanwita Bora Sachdev

Navanwita is the editor of The Tech Panda who also frequently publishes stories in news outlets such as The Indian Express, Entrepreneur India, and The Business Standard