This is a slightly shortened version of the text accompanying the Atlantic Council’s CBDC Tracker, reproduced with the Council’s kind permission.

What is a Central Bank Digital Currency (CBDC)?

A CBDC is the digital form of a country’s fiat currency that is also a claim on the central bank. Instead of printing money, the central bank issues electronic coins or accounts backed by the full faith and credit of the government.

But don’t digital currencies already exist?

There are already thousands of digital currencies, commonly called cryptocurrencies. Bitcoin is the most well-known fully decentralized cryptocurrency. Another type of cryptocurrency are stablecoins, whose value is pegged to an asset or a fiat currency like the dollar. Cryptocurrencies run on distributed-ledger technology, meaning that multiple devices all over the world, not one central hub, are constantly verifying the accuracy of the transaction. But this is different from a central bank issuing a digital currency.

So why would a government get into digital currencies?

There are many reasons to explore digital currencies, and the motivation of different countries for issuing CBDCs depends on their economic situation. Some common motivations are: promoting financial inclusion by providing easy and safer access to money for unbanked and underbanked populations; introducing competition and resilience in the domestic payments market, which might need incentives to provide cheaper and better access to money; increasing efficiency in payments and lowering transaction costs; creating programmable money and improving transparency in money flows; and providing for the seamless and easy flow of monetary and fiscal policy.

What are the challenges?

There are several challenges, and each one needs careful consideration before a country launches a CBDC. Citizens could pull too much money out of banks at once by purchasing CBDCs, triggering a run on banks — affecting their ability to lend and sending a shock to interest rates. This is especially a problem for countries with unstable financial systems. CBDCs also carry operational risks, since they are vulnerable to cyberattacks and need to be made resilient against them. Finally, CBDCs require a complex regulatory framework including privacy, consumer protection, and anti-money laundering standards which need to be made more robust before adopting this technology.

What are the national security implications of a CBDC?

New payments systems create externalities that impact the daily lives of citizens, and can possibly jeopardize the national security objectives of the country. They can, for example, limit the United States’ ability to track cross-border flows and enforce sanctions. In the long term, the absence of US leadership and standards setting can have geopolitical consequences, especially if China and other countries maintain their first-mover advantage in the development of CBDCs. Our work on digital currencies at the Atlantic Council’s Geoeconomics Center is at this nexus of the future of money and national security.

This is a slightly shortened version of the text accompanying the Atlantic Council’s CBDC Tracker, reproduced with the Council’s kind permission.