What if a new form of public money changed everyday payments overnight? This introduction sets out what CBDCs are and why they matter now in the context of current financial market trends.
The Bank for International Settlements defines a CBDC as digital money that is a direct claim on a central bank, not a balance at commercial banks. That distinction affects trust, resilience, and how people use money for routine payment needs.
The European Central Bank is preparing a digital euro, with design, rulebook and infrastructure choices due by end‑2025. Online and offline use cases will be tested, with distribution via payment service providers as one likely model.
With cash declining and cards, mobile, and instant payments on the rise, policymakers must weigh privacy, anti‑money‑laundering checks, deposit shifts, and cross‑border effects, as highlighted in the latest financial news. The rest of this report explores the global picture, design levers, and what the changing payments landscape may mean for the UK.
Key Takeaways
- Definition: A CBDC is public digital money that sits as a liability of the central bank.
- Timing: The ECB aims to finalise the digital euro design and rules by end‑2025.
- Use cases: Online and offline payments, distributed via existing payment providers.
- Comparison: Unlike bank deposits, a CBDC is a direct claim on public money.
- Adoption hinge: Uptake depends on clear benefits, user experience, and sound policy design.
Why CBDCs are on the agenda now: purpose, context, and UK relevance
With fewer transactions done in cash, as highlighted in recent banking news, policymakers are rethinking how public money should work in a digital age. The IMF estimated under 20% of point-of-sale value used notes and coins in 2021, and use has fallen since.
The euro area shows this shift clearly: ECB data point to an 8% fall in cash at shops over two years while cards, contactless, and mobile wallets have risen fast. Instant payments and e‑wallets now shape many everyday payment choices.
Why it matters: supporters say new public options could streamline payments, boost financial inclusion, and keep a one-to-one claim on public liabilities to support the monetary function. Critics counter that existing systems may deliver similar gains without significant policy change.
- Macro drivers: pandemic-led digitisation, lower cash use at point-of-sale, faster instant and mobile channels.
- High-profile test case: the euro project signals why major jurisdictions examine a public alternative to international schemes.
- UK relevance: design choices in Europe will shape cross-border links in banking, cards, and wallets that affect UK consumers.
| Driver | Implication | UK relevance |
|---|---|---|
| Declining cash | Need to preserve trust in public money | Must protect those who rely on cash |
| Payment digitisation | Faster, cheaper transactions | Interoperability with UK schemes required |
| Strategic autonomy (euro) | Reduced dependence on non‑European providers | Lessons for UK policy and cross‑border commerce |
| Inclusion focus | Design must serve older people and disabled users | Access without forcing digital-only accounts |
Central Bank Digital Currencies (CBDCs) – progress, risks, and adoption.
Global progress and adoption landscape at present
A wave of experiments shows policymakers weighing practical uses before committing to full‑scale roll‑outs. Only three retail systems have launched so far: the Bahamas (2020), Nigeria (2021), and Jamaica (2022).
Worldwide, 103 jurisdictions are exploring these initiatives. Of those, 44 run pilots, 20 are developing systems, and 39 remain in research phases.
From pilots to preparation: where authorities stand
Most authorities test distribution, privacy settings, and offline functionality with industry partners. Trials focus on user experience, regulatory alignment, and interoperability with existing payment rails.
Timeline and aims for the digital euro
The European Central Bank began an investigation in 2020 and moved to preparation in 2023. It plans to finalise design, a rulebook, and select infrastructure providers by the end of 2025.
Key aims are to complement cash, reduce reliance on non‑European card schemes, and make the digital euro available online and offline via payment service providers.
How public options differ from crypto and stablecoins
Public systems are liabilities of the issuing authority and offer a value anchor. By contrast, crypto‑assets rely on market confidence, while stablecoins depend on reserve quality and redemption mechanisms.
“Live roll‑outs remain few, signalling cautious uptake and the need for clear, compelling use cases.”
Shifts in payments
IMF and ECB data show cash in point‑of‑sale transactions falling as cards, contactless, mobile, and instant channels grow. E‑commerce also reshapes how people choose to pay.
That trend creates room for a public option that preserves convertibility and competition while partnering with private PSPs to reach users.
- State of play: widespread research, limited live launches.
- Direction: gradual roll‑out focused on resilience, inclusion, and performance.
Financial stability trade-offs, cross-border spillovers, and privacy
A new public payment option could change how households hold deposits and how banks manage cash flows. ECB scenarios model household moves under holding limits from €1,000 to €5,000. A €5,000 cap may see up to 12% outflows, while a €3,000 limit keeps flows below 9%.
Modelled liquidity metrics — the LCR and NSFR — stay above regulatory minima in these scenarios. Only sustained outflows above 15% would push reliance on central facilities, and extreme runs (30–40%) would force major institutions to seek significant support.
Impacts vary by institution. Retail-focused banks with many household deposits face larger strains than wholesale lenders. In stress, firms draw on reserves, interbank markets, or central facilities to meet payment needs.
“Non‑resident access could amplify cross‑border shocks, raising exchange‑rate volatility and fuelling ‘digital dollarisation’ threats to weaker currencies.”
Privacy remains contentious. Greater AML/KYC efficiency can coexist with surveillance worries. Design choices — holding limits, remuneration, staged roll‑out, and tight access rules — help reduce systemic risks while balancing compliance and user trust.
Design choices that shape outcomes: policy levers, technology, and operations
How regulators set limits, privacy rules, and interfaces will decide the system’s success in stores and online.
Holding limits and remuneration
Rationale: a €3,000 individual cap is designed to keep the digital euro focused on payments, not saving. Modelling shows outflows under this cap stay below 9%, with liquidity ratios above regulatory thresholds.
Remuneration choices matter. Non‑interest balances discourage hoarding, while tiered or zero rates keep competition with bank deposits limited.
Online and offline functionality
Both modes are planned. Offline use supports resilience during outages and helps users with poor connectivity.
Privacy for offline transfers would mirror cash: limited traceability until a device reconnects. That reduces data exposure while controls act when balances sync online.
Interoperability and cross-border use
Operational safeguards, such as waterfall and reverse waterfall routing, will automatically move excess balances to linked private accounts or top up wallets. This keeps payments seamless for users.
- Technical alignment: common APIs and certification for payment systems and PSPs will be essential.
- Policy alignment: common standards on traceability and data sharing will reduce fragmentation across jurisdictions.
- Governance questions: access for non‑residents, dynamic limits in stress, and harmonising privacy standards remain open.
“Jurisdictions with tighter traceability face hard questions when transacting with those granting greater privacy,” — a remark attributed to policy debate participants.
Impact on banks, payments, and consumers
Changes to how money is distributed could alter fees, service models, and user experiences across the banking sector. The ECB plans distribution via existing payment service providers, with basic services free to end users and inter-PSP fees to balance costs.
Costs and distribution for PSPs and banks
PSPs would deliver front-end services while inter-PSP fees compensate distribution costs. That model aims to keep basic services free for consumers while aligning incentives across the ecosystem.
European banks may face platform deployment, third‑party vendor charges, and extra compliance work. Industry groups warn these costs could divert resources from other payments innovation.
Financial inclusion and the digital divide
Experience in the Bahamas, Nigeria, and Jamaica shows uptake can be modest. Incentives may be needed to boost use, so rollout should plan gradual scaling rather than rapid substitution of existing services.
Offline functionality and simple user interfaces are vital to reach those without smartphones or steady connectivity. Assisted channels and clear complaint routes will help build trust among older and digitally excluded users.
Integration with existing systems
Payment systems and core banking platforms need robust APIs, identity checks, dispute resolution, and fraud monitoring aligned with new rules. Smooth interfaces reduce disruption for banks, PSPs, and customers.
| Area | Implication for banks | Consumer impact |
|---|---|---|
| Distribution model | Integration costs; inter-PSP fee receipts | Free basic services; potential new choices |
| Operational change | Vendor fees; support and compliance overheads | More resilient transactions during outages |
| Inclusion measures | Investment in assisted services | Access for those without advanced devices |
| Market dynamics | Greater retail competition for payment services | More value-added features from banks and PSPs |
Open questions for policymakers and central banks
Future choices will determine whether a state-backed payment option enhances resilience or fragments markets. Policymakers need clear answers to weigh trade-offs for the UK and partners.
Demand, reserve configuration, and capital flow management
First, reliable estimates of the likely demand for CBDCs are essential. Authorities must test how different uptake scenarios affect banks, liquidity, and the wider financial system in normal times and in stress.
Second, wider use of public tokens could reshape which currencies serve as reserves. A credible euro-linked option might strengthen the euro’s role, a possibility the European Central Bank will watch closely.
Third, easier access to safe, remunerable public balances may change capital flows. That raises questions about how authorities would use capital account tools to manage sudden movements and preserve liquidity.
Fourth, interoperability between jurisdictions with strict traceability and those prioritising privacy will need minimum data standards. Cooperation is vital where cross-currency links exist.
- Banks’ roles: define distribution duties so intermediation and lending are not undermined.
- System resilience: align designs to strengthen, not fragment, payment and settlement infrastructure.
- Adoption pathways: stage-gated pilots can generate evidence to set limits, remuneration, and wallet features that preserve user value.
“What will be the potential demand, and how might it affect reserve currency configuration and capital flows?” — question posed by Fabio Panetta
Conclusion: Central Bank Digital Currencies (CBDCs) – progress, risks, and adoption.
Practical evidence from pilots will shape how a state‑backed payment instrument fits into everyday finance. ECB modelling shows a €3,000 holding limit keeps outflows below 9% and leaves bank liquidity metrics above regulatory minima, easing pressure on the wider financial sector.
Design choices must protect banks’ intermediation role. Holding limits, remuneration, and staged roll‑outs can reduce sudden liquidity shifts and support financial stability.
Privacy, cross‑border spillovers, and the threat of currency substitution need international cooperation and clear governance. User value, simple services, and offline functionality will drive use, while inclusion and consumer protections build trust.
UK stakeholders should watch the digital euro closely. With measured implementation and interoperable systems, a new public money option could enhance payments without undermining stability.
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