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The MENA Blog

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Writer's pictureShamsul Anam Emon

A Comprehensive Guide to Central Bank Digital Currencies (CBDC)


Central Bank Digital Currencies

Introduction to Central Bank Digital Currency (CBDC)


In an era dominated by rapid technological advancements and a significant rise in digital payments, Central Bank Digital Currency (CBDC) has emerged as a game-changer in global financial systems.


As central banks worldwide explore the possibility of issuing their own digital currencies, CBDCs stand out as a potential solution to enhance monetary systems, streamline transactions, and address the increasing prominence of cryptocurrencies.


In this article, we will break down CBDC, its types, benefits, and how central banks like Qatar Central Bank (QCB) are working on wholesale CBDC programs.


What is Central Bank Digital Currency (CBDC)?


A Central Bank Digital Currency (CBDC) is a form of digital money issued by a country’s central bank. It serves as legal tender, similar to physical cash, but exists purely in digital form. Unlike cryptocurrencies such as Bitcoin, CBDCs are centralized and regulated by central banks, making them a secure and stable form of digital currency.


CBDCs typically rely on cryptographic ledger technology, similar to blockchain, but with added security and oversight from central authorities.


Types of CBDC: Retail and Wholesale


Retail CBDC


Retail CBDC allows everyday individuals and businesses to hold and use digital currency directly, much like they use physical cash or debit cards today. Retail CBDC is essentially a digital version of physical currency (notes and coins) that the general public can access. This type of CBDC is designed to simplify transactions, increase access to financial services, and reduce costs associated with the traditional monetary system.


Wholesale CBDC


Wholesale CBDC, on the other hand, is designed for large-scale financial institutions such as banks. This form of digital currency is used for high-value, institutional transactions, typically between commercial banks and other licensed financial entities. Wholesale CBDCs operate similarly to traditional systems like Real-Time Gross Settlement (RTGS), where transactions occur directly between licensed institutions, ensuring faster and more secure cross-border and domestic payments.


The Benefits of CBDC


CBDCs bring multiple benefits to the financial system, primarily stemming from their cryptographic nature. Here are some key advantages:


  1. Security and Control: CBDC transactions are secured by digital signatures, ensuring that transaction data cannot be altered or repudiated. Only the owner of the digital currency can transfer it, which adds a layer of control and security to the financial system.

  2. Transparency: The digital ledger system used for CBDCs provides a single source of truth, eliminating the need for reconciliation between parties. This ensures that transactions are transparent, traceable, and immutable.

  3. Efficiency: Traditional banking systems often require multiple steps for transactions, including the separation of messaging and accounting updates. CBDCs merge these steps into a single process, allowing for immediate transaction finality and simplified operational workflows.

  4. Cross-Border Transactions: Central banks are particularly interested in CBDCs because they could revolutionize the speed and cost-efficiency of cross-border payments, reducing fees and settlement times.

  5. Programmability: CBDCs can harness the power of programmable payments, allowing for automated transactions based on pre-defined rules, which opens up new possibilities for innovative financial products and services.


The Global Landscape of CBDC Development


The development of CBDCs is accelerating globally. As of today, 134 countries, representing 98% of global GDP, are either researching or deploying CBDC systems. Central banks are conducting trials to assess the feasibility and benefits of introducing a digital version of their currency to address domestic and international financial needs.


The Qatar Central Bank Wholesale CBDC Program


Will Qatar Issue a Retail CBDC?


At present, Qatar’s Central Bank (QCB) is focusing on wholesale CBDC, with no immediate plans for retail participation. However, there is potential for future retail CBDC programs, allowing wider public access to digital currency if the initial wholesale program proves successful.


Digital Securities and the QCB CBDC Program


One key component of the QCB wholesale CBDC (wCBDC) initiative is the integration of digital securities, particularly government bonds. These digital securities offer a new way to settle ownership efficiently by using CBDC for payment. This infrastructure can streamline the financial market by reducing intermediaries and improving the settlement process.


Participants in the QCB wCBDC Program


In the first phase of the QCB wholesale CBDC program, only selected banks will be allowed to participate. This limited-access framework is designed to test and evaluate the system's effectiveness before broader implementation.


Timeline for QCB CBDC System


The QCB wholesale CBDC program is expected to roll out in 2024. The first phase of the project will be concluded by the end of the year, and the central bank, along with participating banks, will evaluate the system's performance before deciding on the next steps.


Key Technologies Behind CBDC: Distributed Ledger Technology (DLT)


The QCB wCBDC system will be built using Distributed Ledger Technology (DLT). While DLT shares some similarities with blockchain, it has been specifically designed for regulated use cases, allowing central banks like QCB to govern the system in compliance with national laws and international best practices. DLT’s secure and transparent features make it an ideal platform for regulated digital currencies and digital securities.


Monetary Policy and Legal Implications


The first phase of the QCB CBDC program will be purely experimental, with no impact on monetary policy as it does not involve real money. Should the program move forward, it is designed to remain neutral regarding monetary policy.


Regarding legal restrictions, there are currently no barriers to issuing a wholesale CBDC in Qatar. However, for cross-border transactions, some legislative adjustments may be required to align Qatar’s legal framework with international standards.


Commercial Bank Involvement and Benefits


Commercial banks stand to benefit significantly from CBDC. They can use CBDC to settle inter-bank payments and conduct delivery versus payment (DvP) transactions 24/7, reducing the need for intermediaries. Banks can also explore new services, such as tokenized deposits backed by fiat currency, enabling more efficient treasury operations.


In the initial phase of the QCB wholesale CBDC program, participating banks will experiment with two primary use cases:


  1. Payments and Transfers: Instant, bilateral settlement of payments using CBDC.

  2. Digital Securities: Immediate settlement of financial market securities with CBDC.


These transactions are designed to eliminate settlement risks and improve the speed and reliability of the financial system.


The Role of AI in CBDC


The QCB wholesale CBDC program will incorporate Artificial Intelligence (AI) to enhance liquidity management. AI will be used to develop a liquidity forecasting model, which will help participating banks manage their liquidity positions more efficiently. This will be a crucial tool in ensuring the system's stability and smooth operation.


Conclusion


CBDC is not just a digital upgrade to cash—it represents a fundamental shift in how central banks manage monetary systems, how banks handle payments, and how individuals access financial services.


With central banks like QCB at the forefront of wholesale CBDC experimentation, the global financial landscape is on the brink of transformation.


As this technology matures, we can expect to see its widespread adoption, reshaping cross-border payments, financial markets, and the future of digital finance.


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