What finance needs to know about central bank digital currencies

With more countries such as China and Nigeria launching or piloting digital currencies, here are four things finance teams should know to get ready.
People buy food at stalls promoting China's digital yuan, or e-CNY, during the 2022 China International Fair for Trade in Services (CIFTIS) in Beijing, China, 1 September 2022.
People buy food at stalls promoting China's digital yuan, or e-CNY, during the 2022 China International Fair for Trade in Services (CIFTIS) in Beijing, China, 1 September 2022.

What type of currency will your company use for transactions in the future?

Interest in — and the use of — digital currencies is increasing around the world. Cryptoassets such as bitcoin have received much of the attention in this area. However, a number of events have raised serious questions about the stability of this market. After reaching roughly $3 trillion in late 2021, the global market capitalisation of these assets has slumped to around $1 trillion today, according to price and data platform CoinGecko.

Against this volatile backdrop, central banks around the world are exploring — and in some cases launching — central bank digital currencies (CBDCs), which are the digital version of a central bank currency. These currencies are a liability of and regulated by the issuing central bank, and their value is tied to the value of the country's fiat currency.

CBDCs "offer in digital form the unique advantages of central bank money: settlement finality, liquidity, and integrity", according to the Bank for International Settlements (BIS), which acts as a bank for central banks. It described CBDCs as "an advanced representation of money for the digital economy".

When the Atlantic Council, a US-based international affairs think tank, started its Central Bank Digital Currency Tracker in 2020, there were 35 countries involved in CBDCs at some level. Today, the tracker features more than 100 countries and currency unions (such as the European System of Central Banks, which represents the 19 members of the EU that use the euro).

"That's a rapid acceleration," said Josh Lipsky, senior director at the Atlantic Council's GeoEconomics Center. "Central banks are cautious institutions by nature. For central banks representing over 95% of global GDP to be interested in this is pretty strong progress."

A stable alternative

Banks and other financial institutions already engage in digital transactions with central banks in interbank transfers. CBDCs, however, offer another alternative to cash-based transactions for consumers and companies. The pandemic pushed consumers and companies to shift away from in-person transactions in bricks-and-mortar locations to online commerce. Cash use dropped as a result — for example, physical currency transactions fell to 3% of overall payment transactions in Norway, according to McKinsey.

CBDCs also provide a digital choice that is more stable than the volatile cryptoasset market of bitcoin and other currencies, and one that allows central banks to retain their regulatory role.

As a case in point, when the Chinese central bank, the People's Bank of China, banned all cryptoasset transactions within the country in September 2021, it pointed to the risks related to their speculative nature. In fact, China has become one of the countries spearheading the use of CBDCs, launching the e-CNY in January 2022 as its own digital yuan (the yuan is also known as the renminbi, or RMB) and piloting it in an expanding number of cities and provincial-level administrative regions. December saw a further development, according to Bloomberg and other reports, whereby the Bank of China (Hong Kong) offered 500 trial accounts linked to the e-CNY, which were taken up in two days.

Getting ready for CBDCs

Based on the experience of Chinese companies — and the expected expansion of CBDC exploration by central banks — companies can take these steps to prepare for using CBDCs:

Don't expect instant uptake. Even when CBDCs are launched, they may not achieve immediate acceptance if consumers already have other digital payment options. In China, the popularity of mobile payment and digital wallet services such as WeChat Pay and Alipay is relatively high, according to China-based entrepreneur Gabriel Wu, FCMA, CGMA. For a CBDC, as a result, "there may still be a relatively long way to go before it becomes widespread", he said.

In addition, given current restrictions on foreign access to the e-CNY and the e-wallets that must be used with them, the e-CNY has no application in overseas transactions right now, said Aaron Huang, FCMA, CGMA, the CFO of McDonald's China.

The greatest potential for China and Chinese enterprises to benefit from the digital yuan is if companies in countries with close ties to China, especially those in countries without complex financial systems, can progress to making cross-border payment through the digital yuan, said John Zheng, FCMA, CGMA, the CFO of Mitsui Sumitomo Insurance China. This would promote the internationalisation of China and Chinese enterprises. He referred specifically to countries included in China's Belt and Road Initiative, an infrastructure project that would stretch from East Asia to Europe, and to the 11 cities in the Greater Bay Area.

There are many developments that could help advance potential CBDC use in international trade. In September last year, China, Hong Kong, Thailand, and the United Arab Emirates carried out cross-border testing of CBDCs, coordinated by the BIS. It involved $22 million in actual transactions. Other similar cross-border tests have demonstrated CBDCs' potential use in international trade.

In October, the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, which facilitates interbank transfers, said that it had "successfully shown that [CBDCs] and tokenised assets can move seamlessly on existing financial infrastructure — a major milestone towards enabling their smooth integration into the international financial ecosystem".

The best approach for finance leaders should be to monitor activity in this area, particularly changes in consumer behaviour or ease of international transactions, so that they are prepared for a greater embracing of CBDCs. "Keep your mind open to any possibilities of future transformation," Huang said.

Anticipate changes in transaction speed. What differences can finance leaders expect when CBDC use becomes prevalent? "If your company is operating in China or doing cross-border operations anywhere, money is going to be settled between banks much more quickly," Lipsky said. Today, it can take hours or days to settle between banks cross border, but technology can reduce the waiting time for digital currencies to seconds or minutes, allowing for faster access to funds or credit.

"The digital yuan can enable enterprises to develop and make enterprise financing more convenient," Zheng said.

Be prepared to implement new controls. Digital transactions — even those involving CBDCs — are subject to risks such as counterfeiting and fraud, just like cash transactions, noted the US Federal Reserve Board. Monitoring and verifying transactions conducted online instead of through more traditional means is different, however. That means that finance teams will have to consider new controls around this type of currency, from e-wallet security and other cybersecurity considerations to transaction process design, Huang said. "If direct payments are made from a corporate e-wallet in the future, the risks involved will be very different from those in the traditional banking process," he said.

Other challenges to consider include privacy, compliance, system reliability, and recourse in the case of controversial transactions when using the digital yuan, according to Zheng.

Get ready to accept a wide range of payment types. Companies now paid in cash or with credit cards will increasingly find customers expecting to use a variety of digital and traditional assets, including CBDCs and cryptoassets such as Stablecoins. "You're heading into a potentially fractured payments world," Lipsky said. "Customers will want to settle in the fastest, cheapest, quickest, safest way possible. They will want the companies they deal with to make it easy for them to use what they want."

Taking a new place on the world stage

The most important first step for finance leaders is to recognise the potential changes that CBDCs can make. "There has been a perception that smaller nations and economies are the only ones pursuing CBDCs," Lipsky said, "but that's no longer the case." With some of the world's largest economies examining or jumping into CBDC use, this is a good time for finance leaders to consider the impact for the companies and the markets in which they operate.

Highlights of CBDC developments around the world

Among the numerous countries examining CBDCs:

  • The European Central Bank is in the investigation phase of its digital euro project, which it expects to conclude by October 2023.
  • Several African countries are making inroads in CBDCs. Nigeria launched its e-naira in October 2021. Ghana and South Africa are in the pilot phase, while more than ten other African countries are in the research phase, according to the Atlantic Council's Central Bank Digital Currency Tracker.
  • A number of other countries have launched CBDCs, including the Bahamas and Jamaica in the Caribbean, while Brazil and Canada are in the development phase, according to the tracker. It defines this group as those that have initiated the technical build and early testing of a CBDC in controlled environments.
  • India launched a pilot digital rupee for the "wholesale segment" on 1 November 2022.
  • In the US, the Federal Reserve Board is considering the possible benefits and risks of CBDCs but has not decided whether to develop or launch one. "Our key focus is on whether and how a CBDC could improve on an already safe and efficient US domestic payments system," the Fed said on its website.
  • The Bank of England, the UK's central bank, is looking carefully at how a UK central bank digital currency might work but has not yet decided to introduce one.

— Anita Dennis is a freelance financial writer based in the US. To comment on this article or to suggest an idea for another article, contact Oliver Rowe at