EuroFinance

Central banks and economies around the world are increasingly venturing into the realm of Central Bank Digital Currencies (CBDCs). A report by the Atlantic Council reveals that 134 countries and currency unions, representing 98% of global GDP, are either exploring or actively developing CBDCs. This marks a sharp increase from just 35 countries in May 2020, Currently, 66 countries are in the advanced phase of development—through pilot programs, and launches, reflecting a growing global desire to explore digital currencies issued by central banks. Among the G20 nations, every country is engaged in CBDC research, with 19 actively participating in advanced stages, including Brazil, Japan, India, Australia, Russia, and Turkey.

To date, three countries — the Bahamas, Jamaica, and Nigeria — have fully launched their CBDCs, with both Nigeria and the Bahamas seeing substantial growth in their digital currencies’ adoption. The focus of these nations has been on expanding the reach of their retail CBDCs domestically, paving the way for future integration into the global digital payments ecosystem. Across Europe, both within the euro area and beyond, countries are increasingly testing wholesale CBDCs, facilitating transactions both domestically and across borders, the report added.

Many of these projects reflect a collective push towards reducing dependency on traditional payment systems, particularly within the BRICS nations — Brazil, Russia, India, China, and South Africa — all of which are piloting their own digital currencies, according to the same report.

Recently, AE Coin received regulatory approval from the Central Bank of the UAE as a stablecoin linked to the dirham. Businesses in the UAE may soon have the option to accept AE Coin, making it the first cryptocurrency in the Emirates to be officially regulated.

“AE Coin is built on blockchain technology and designed to provide users with stability, efficiency, and security in their transactions,” Ramez Rafeek, general manager of AE Coin, wrote on LinkedIn.

A Juniper Research study  forecasts that, by 2031, the number of global payments made using CBDCs will surge to 7.8 billion, up from just 307.1 million in 2024. Collaborative efforts such as Project mBridge and Project Icebreaker, which aim to connect national CBDCs, are set to reduce nations’ reliance on traditional payment rails and intermediaries, offering the potential to save $45 billion annually in cross-border payments by 2031, according to the report.

At the EuroFinance International Treasury Management 2024 in Copenhagen, William Lovell, senior technology advisor at the Bank of England, and Britta Döttger, group treasurer at Roche, shared their insights on how these transformations are shaping the future of money, payment systems, and the role of central banks.

The future of money: speed, security, and infrastructure

Lovell discussed the evolution of banking and payment systems over the last few decades. He reflected on the early days of electronic automation, where the primary goal was to digitise traditional paper-based processes. “What we were doing then was taking the paper processes that had existed for a very long period of time and computerising them,” Lovell explained. This initial shift resulted in faster, more efficient, and cheaper transactions. However, the current phase, according to Lovell, is about “digitalisation” — a deeper transformation that reflects the ease and flow of goods and services through the Internet.

For Lovell, this digitalisation of payments means that money must move as fluidly as information does in the digital world. “Every time money is flowing, something else is happening in the other direction,” he said. “A payment is only half of the story.” The challenge, he argued, is ensuring that the underlying payment infrastructure reflects these new dynamics.

One of the key aspects of this shift is the role of central banks, which provide the foundational infrastructure that supports payment systems. “We want to understand how change needs to be reflected in the payment system,” Lovell explained. Central banks are focusing on building a secure, stable infrastructure that allows businesses, including banks, to deliver the services needed by their customers. However, as payment speeds increase and new models like real-time payments and programmable money emerge, central banks must ensure that security and stability are not compromised.

Döttger shared her vision for a world where money moves as seamlessly as electricity. Drawing a parallel to the way consumers stream movies, Döttger suggested that payments should flow in a continuous, real-time manner, without the constraints of batch processes or counterparty limits. “I think we want to have money flowing through the system almost easily, like electricity,” she said, emphasising that this would drastically alter the role of corporate treasurers.

Döttger’s vision goes beyond faster payments. She imagined a system where counterparty risk limits are no longer needed, and where money can move instantly, allowing businesses to operate with greater efficiency. “When you think about the velocity of money, it should be continuous. Right now, we are still organised in a step-by-step, sequential process, but new technologies allow us to do much more in parallel,” she said.

For Döttger, this transition is not just about speed; it’s about creating a more dynamic financial system that can better support global commerce. During the pandemic, companies learned how important it is to work end-to-end, beyond the confines of traditional financial institutions. “We need to work much more end-to-end,” she explained, highlighting the importance of collaboration across all stakeholders in the financial ecosystem.

The emergence of CBDCs

Lovell provided insight into the differing roles CBDCs play in different economies. In developing countries, CBDCs offer an opportunity to leapfrog existing financial infrastructure, similar to how mobile phones allowed many nations to bypass landline technology. “In more developed economies, CBDCs are seen as a supplement to existing payment systems,” Lovell noted.

The Bank of England is actively collaborating with other central banks to develop standards and address legacy issues that prevent greater interoperability between payment systems. “The world of crypto has largely turned into something that people who have an appetite for risk choose to invest in rather than a payment medium,” Lovell said. This, he suggested, demonstrates the need for a more stable, regulated system. While cryptocurrencies like Bitcoin offer interesting technological innovations, they also face significant hurdles in terms of volatility and lack of intrinsic value.

For countries exploring CBDCs, the International Monetary Fund  (IMF) has outlined a flexible, step-by-step approach to developing these digital currencies, acknowledging the varying degrees of digitalization, legal frameworks, and central bank capabilities across different nations. The IMF’s “5P methodology” — which stands for Preparation, Proof-of-Concept, Prototypes, Pilots, and Production — serves as a guiding framework for central banks to navigate the complexities and risks associated with CBDC development. As more nations move forward in their CBDC journeys, the global financial ecosystem is on the cusp of a new era, one where digital currencies issued by central banks will redefine the future of money, payments, and cross-border transactions.

Bitcoin vs CBDC

“Bitcoin has no intrinsic value,” Lovell explained. “It only has value on the basis that someone else is prepared to buy it from you.” In contrast, CBDCs are designed to provide the stability and certainty needed in daily transactions. Central banks are committed to maintaining the value of these digital currencies, ensuring they remain a reliable medium of exchange.

Recently, Bitcoin reached a record high of over $106,000, marking a 155% increase in one year.

“The concept behind Bitcoin, if the entire world were to adopt it, could potentially lead to a single global currency that works on a universal scale. However, I believe we are currently far from that reality. Right now, Bitcoin serves more as an asset class for investment purposes, largely driven by its volatility. The real potential of Bitcoin would only become evident if the original vision for it—one of decentralised, global currency—were to fully materialise,” Döttger added.

From a corporate treasury perspective, Döttger explained, “I would be comfortable using Central Bank Digital Currencies (CBDCs) in my work, as they would eliminate commercial bank counterparty risk limits, which is a significant advantage.”

Embracing technology in treasury: the role of blockchain

Döttger also shared Roche’s experience with blockchain technology in the treasury space. “We’ve been participating in initiatives where we have joined consortiums working on blockchain technologies to track logistics and improve efficiency in supplier payments,” she explained. This pilot project involved connecting legacy systems with blockchain networks and using smart contracts to trigger payments.

While the potential of blockchain is immense, Döttger noted that the industry is still in the early stages of figuring out how to integrate these technologies seamlessly. “It’s a totally new world when you connect blockchain systems to each other,” she said, emphasising the importance of learning and testing the technology to understand its risks and rewards.

The future of physical money

One common question about the future of money revolves around the fate of physical cash. Lovell addressed this, stating that the Bank of England is committed to printing banknotes for as long as there is demand. “Physical cash is still declining, but we will continue to issue it,” he explained. In the UK, electronic payments overtook cash by volume in 2017, but this trend is not universal. “The real issue is whether merchants accept cash,” Lovell stated, noting that as long as consumers continue to demand cash, it will remain a part of the payment landscape.

Lovell also discussed Brazil’s innovative Pix system, which has become a success story for instant payments. “They went from zero to 60 in a few seconds,” Lovell remarked. The success of Pix demonstrates how developing economies are embracing new payment technologies and leapfrogging traditional systems. Other countries like India, with its Unified Payments Interface payment system, have similarly embraced innovative payment solutions, he added.

The role of regulation in shaping the future

The regulatory landscape was highlighted as a critical factor in shaping the future of money. Lovell noted that as payments become faster, regulatory processes like Know Your Customer (KYC) and Anti-Money Laundering (AML) practices will need to evolve. “We need to adapt our processes as payments move more quickly,” he said.

Döttger, on the other hand, expressed the hope that regulation could become a facilitator for innovation rather than a hindrance. “Regulation should be seen as enabling something, not standing in the way,” she concluded.

Conclusion

The future of money, payment systems, and central bank involvement is being shaped by technological innovation and evolving consumer needs. Central banks, financial institutions, and corporate treasurers all have a role to play in ensuring that the next generation of payment systems is secure, efficient, and responsive to the needs of the modern economy. The shift towards real-time payments, the rise of digital currencies, and the growing role of blockchain technologies signal a dramatic transformation in how money flows through the global economy. While challenges remain, the potential benefits of a more dynamic, efficient, and inclusive financial ecosystem are vast — and the work to realise this future is already underway.