Before Automated Teller Machines (ATMs) were introduced in the late 1960s, accessing your own money meant a trip to the bank during limited banking hours, a wait in line, and an interaction with a bank teller. But when these amazing little “cash machines” started to pop up, the way individuals accessed and interacted with money changed forever. ATMs made banking more personal, more accessible and were set on a trajectory that would democratize financial services.
Fast-forward to the 2020s, and the world is on the cusp of another financial evolution: the Central Bank Digital Currency (CBDC).
Much like the early skepticism that surrounded ATMs, CBDCs have been met with a mixture of excitement, caution, and critique. But if history offers any lessons, the path from skepticism to adoption could be short-lived.
The Advent of ATMs: An Era of Physical Money
ATMs revolutionized the way we interacted with money and brought unprecedented convenience — 24/7 access to cash, reduced dependence on bank hours, and expedited service.
This innovation was not only about access; it was about autonomy and empowerment. It placed individuals in control, allowing them to decide when and where they accessed their funds.
However, the early days of ATMs were fraught with concerns. Would machines replace bank jobs? Could they be trusted to handle transactions accurately? Were they secure from fraud and theft? Over time, as technology advanced and consumers realized the inherent benefits, ATMs not only became universally accepted but integral to our daily lives. Today, there are 3.2 million automated teller machines (ATMs) around the world.
After ATMs, online and mobile payments burst onto the collective scene, but what comes next? What is the next financial breakthrough that will truly change the way we interact with money? Enter the Central Bank Digital Currency (CBDC).
The Rise of CBDCs: A Digital Money Metamorphosis
The initial parallels between ATMs and CBDCs are uncanny. Just as ATMs heralded a change in physical money transactions, CBDCs are setting the stage for an era of digital money. CBDCs are a new type of digital currency issued and governed by a country's central bank. CBDC can harness the power of blockchain to improve the economy, but unlike cryptocurrencies, such as Bitcoin, it is centralized and has the official status of legal tender in the country of issuance.
Today, we find ourselves asking questions reminiscent of the ATM era: Can CBDCs be trusted? What would the global adoption of digital currencies mean for traditional banking systems, privacy, or even monetary policies?
Yet, beyond skepticism, CBDCs promise transformative advantages:
- Inclusion: Millions globally remain unbanked. The World Bank tells us that 1.4 billion adults remain unbanked. CBDCs could bridge this gap, offering an entry into the formal financial ecosystem without the barriers of traditional banking. Additionally, CBDCs offer offline support is also relevant here as there are still plenty of countries that lack stable electricity and/or low internet penetration.
- Efficiency: Cross-border transactions can become faster and cheaper, alleviating many pain points of our current system. Also, the programmability of money, accounts and digital wallets will enable new automated use cases.
- Transparency & Security: Leveraging blockchain technology, CBDCs promise more transparent transactions and enhanced security against fraud.
The promise of CBDCs is already being transformed into practice. In fact, A 2023 white paper from the World Economic Forum states, “The exploration of central bank digital currency (CBDC) has gained significant momentum, with over 100 countries, representing more than 95% of global gross domestic product (GDP), actively engaging in research, development, pilots or fully-launched CBDC initiatives. This exponential increase in exploration highlights the growing recognition of CBDCs as a transformative tool in the future of digital payments.”
From Access to Integration
While ATMs made money access convenient, CBDCs could make it integrative. We're looking at a future where money is not just something we withdraw or deposit but something that's seamlessly intertwined with our daily digital interactions. Imagine smart contracts that auto-execute terms upon fulfillment or subsidies directly delivered to the digital wallets of those in need.
However, this doesn't mean CBDCs will replace cash or ATMs immediately. Much like how ATMs didn't herald the end of bank tellers but rather redefined their roles, CBDCs will coexist with other forms of money, each serving its purpose in a complex financial ecosystem. The difference, however, is all in the timing. ATMs took decades to become a mainstay in our collective experience with money. CBDCs will take a fraction of that time. Once they are fully executed on a global scale, the rate of adoption will be swift and comprehensive.
With that said, just as ATMs were built on a standard set of technology protocols and globally recognized infrastructure, so are CBDCs. A new joint venture called Nabatech combines Decentralized Ledger Technology (DLT) infrastructure and digital identity technologies to fulfill critical CBDC) requirements – from security and privacy to resilience and financial inclusion. This global initiative is set to propel the establishment and launch of a secure and scalable framework for central banks to execute digital strategies that support GDP growth, along with fiscal & monetary policies in the digital era.
CBDCs aren't without their challenges. The questions around privacy / anonymity, the potential for misuse, the technical challenges of scalability, and the risks to traditional banking systems are valid concerns that policymakers and other stakeholders globally are grappling with.
One of the current challenges many countries face is inflation. How can CBDCs help to fight inflation? Generally speaking, changing physical cash to CBDCs will not change the balance sheet. However, it may impact the money velocity, just like ATM did back then but on steroids. According to a recent International Monetary Fund (IMF) report, “because CBDCs are digital, transactions can be conducted remotely, and the digital wallet of the recipient is immediately credited. This rapid turnover in payments can engender structural increases in money velocity or cause money velocity to become unstable.” Instability may encourage inflation. On the other hand, super efficient ecosystem as well as programmability features will contain inflation and will help mange it within the monetary policy designed by a central bank
Yet, the trajectory seems clear. The same way ATMs transitioned from novelty to necessity, CBDCs are poised to become a staple of the financial system. But their true promise lies not just in mirroring the past but in shaping a future where money is more than a means of exchange — it becomes a tool for increased equity, accessibility, and societal progress. In that, the role of the commercial banks and major financial institutions in CBDC implementation is critical as they are at the heart of the engagement between the central bank and the end users.
The emergence and adoption of CBDCs have transitioned from mere speculation to concrete reality. A number of central banks worldwide have taken the leap, integrating CBDCs into their financial systems. The European Central Bank, a significant entity in global finance, set its sights on releasing a CBDC within this ten-year span as of 2023.
Some two dozen central banks across emerging and advanced economies are expected to have digital currencies in circulation by the end of the decade, the Bank for International Settlements (BIS) found in a survey published earlier this month.
Money: The Bigger Picture
Often, we cling to familiar processes or approaches out of comfort, even if they're antiquated and inefficient. The apprehension of change and its potential costs can be daunting. However, history consistently proves that embracing change can be beneficial. Ask anyone who ever had to wait in line at a bank for cash before ATMs were around.
As we chart the future of money, it’s not just about transactions; it’s about changing our very relationship with money. In an era where we grapple with massive economic inequality, CBDCs, if implemented correctly, can be more than a convenience—they can be a tool for greater financial equity.
As we stand at yet another crossroads of financial technology, it's worth considering: What kind of financial world are we building? And more critically, who is it for?