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Central Bank Digital Currency
Frequently Asked Questions
The CBCS is often asked what a Central Bank Digital Currency (CBDC) is and where it stands on this matter. In light of this, we provide the answers to the most frequently asked questions on CBDCs.
A Central Bank Digital Currency (CBDC) is a digital form of the official currency issued and regulated by a central bank, just like physical cash, but in digital form. It serves as legal tender and is fully backed by the central bank. In the monetary union, there are currently two types of central bank money: physical currency issued by the Centrale Bank van Curaçao and Sint Maarten (CBCS) and digital balances that commercial banks hold at the CBCS. CBDCs are expected to be stable as they are backed by the issuing government and as in the case of physical currency, it will be pegged to the US dollar and subject to the regulatory framework and safeguarded through the CBCS’ monetary policy.
CBDCs are still in their early stages of development and most central banks, including the CBCS, are exploring the potential benefits and risks of this instrument before deciding to implement it. Therefore, the CBCS is monitoring the developments in CBDC closely and analyzing the possible effects of a digital Caribbean guilder for Curaçao and Sint Maarten.
Given the high investment involved, current policy initiatives and the perceived risks, in due time, the CBCS will conduct a thorough feasibility study and consult with relevant stakeholders before deciding whether and when to introduce a CBDC. Currently, there are no compelling reasons to introduce a CBDC, but the CBCS does not exclude an introduction in the future.
There are two known types of CBDCs: the wholesale CBDC and retail CBDC. Wholesale CBDCs are intended for use among financial institutions, such as banks, to facilitate interbank and cross border payments and settlements. Meanwhile, retail CBDCs are intended for use by the general public for day-to-day transactions, similar to how you would use cash or a debit card.
In the case of Curaçao and Sint Maarten, a retail CBDC would be distributed to the general public through intermediaries such as commercial banks and other payment service providers. The public would have to load the digital currency on a wallet app installed on their smartphone via their commercial bank or by topping up at another payment service provider (such as a top-up agent). Unlike existing digital money (such as bank account balances or payment apps), a CBDC would be a direct liability of the central bank and not of a commercial bank as it is fully backed by a central bank.
Advantages related to a (retail) CBDC are that it is a safe store of value, promotes payment efficiency, lowers transaction costs, boosts financial inclusion, and offers enhanced security features. A more secure and efficient payment system can meet future needs and demands of the private sector and digital economy. Furthermore, improvements in cross-border payments by using new technologies can lower costs and simplify distribution channels. Moreover, a CBDC could help include low-income households in the financial system, contributing to financial inclusion.
Comparable countries in the region like The Bahamas, Jamaica, and member countries of the Eastern Caribbean Currency Union (ECCU) have already issued CBDCs. However, the digital currency in the Bahamas, i.e., the Sand Dollar, accounts only for less than 0.1% of the currency in circulation. Meanwhile, in the Eastern Caribbean Currency Union (ECCU), the D-Cash represents only 0.16% of the currency in circulation. Even in China, which is at the forefront of CBDC with its digital yuan (e-CNY), users represent a mere 0.13% of the total currency in circulation as of the end of 2022. The uptake of CBDCs has so far been low in these countries mainly because of inadequate awareness and infrastructure integration.
Furthermore, according to CBDC Tracker of the Atlantic Council, only 11 countries have adopted CBDCs since June 2023, while 130 countries, representing 98 percent of global GDP, are exploring a CBDC.
CBDCs are currently being considered as a means to expand safe payment options, not to reduce or replace physical currency. In addition, various central banks around the world indicated that CBDC will complement or coexist with existing payment methods (including cash), not replace them. Furthermore, central banks are committed to ensuring the continued safety and availability of cash. A major advantage of cash is that it can be used entirely offline, enabling infinite transactions in which value is physically exchanged between parties. Meanwhile, offline-available CBDC structures are being explored, but the related risks when no online connection is available must be dealt with.
The main perceived risks of CBDCs are related to privacy concerns and data security, the impact on the banking sector in particular and the financial system in general (e.g., disintermediation risks), and operational challenges (e.g., interoperability with existing payment systems or platforms). To mitigate the possible negative effects of these risks, central banks can impose holding and transaction limits for the use of CBDC by businesses and individuals and implement robust regulatory frameworks.
Last updated: 04.10.2024 17:10