Unpacking Central Bank Digital Currency (CBDC) Implementation Challenges and Risks

Introduction

The rapid development of digital finance and financial technology has inspired a number of innovations, including cryptocurrency. Due to these innovations, the monopoly to issue currency, previously the sole prerogative of the central bank, has been broken, and the private sector can now issue digital currency (Engert & Fung, 2017; Kilponen et al., 2017). Since then, the exceptional growth of cryptocurrency and the acceleration of digital payments has led central banks to aggressively consider issuing their own digital currencies, known as central bank digital currency (CBDC; Alonso et al., 2021; Engert & Fung, 2017). According to Opare and Kim, (2020), since the birth of the first private digital currency, Bitcoin, in 2009, there have been over 5,000 privately issued digital currencies, and it is predicted that these digital currencies, including Bitcoin, Ethereum, and many others, will threaten financial system stability and the maintenance of monetary policy. For this reason, numerous central banks are investigating CBDC as a strategy to mitigate this risk. Furthermore, global events such as the COVID-19 pandemic and the emergence of global stablecoins put forward by Meta (formerly Facebook) known as Libra have accelerated central banks’ interest in CBDC (Morales-Resendiz et al., 2021; Ponce et al., 2020). In assessing how Libra and Euro CBDC influences European banks, Sandner et al., (2020) argued that this may lead to large-scale disintermediation of the financial sector, and digital bank runs could be a possibility. However, private digital currency and CBDC should be seen as opportunities rather than threats.

There are numerous reasons for the launch of CBDC, including the central banks’ need to maintain monetary control, ensure central bank relevance in a rapidly evolving digital financial system, provide an alternative to cryptocurrency, and enable financial inclusion as a response to the declining use of cash and advancement in digital payments as a tool in the digitalisation of economies (Alonso et al., 2020). However, CBDC represents a highly debatable issue, possessing an equal share of proponents as well as antagonists. Persons expressing opposition to CBDC state the following reasons to justify their position:

• 1.

  CBDC can accelerate financial exclusion;

• 2.

  CBDC is expensive, but offers no immediate tangible benefits;

• 3.

  CBDC can distort the financial system, especially the disintermediation of commercial banks;

• 4.

  CBDC can lead to loss of monetary policy control by central banks;

• 5.

  CBDC can increase the financial system’s exposure to digital and cyber-security vulnerabilities;

• 6.

  There are no guarantees of public demand for CBDC;

• 7.

  There remains insufficient evidence proving the CBDC concept;

• 8.

  There have been failed attempts to implement CBDC; and

• 9.

  CBDC cannot effectively replace cash.

According to BIS (2021a) and Kiff et al. (2020b), the introduction of CBDC represents a complex issue possessing multidimensional perspectives expanding beyond a central bank’s typical application of information technology, as it requires extensive political, social, and detailed design choices. Furthermore, launching a CBDC could trigger major disruptions to the central bank’s monetary policy role, negatively influencing financial sector stability, currency exchange rate, and efficient operations of a country’s payment system.