Why Are Central Banks Racing to Research Digital Currencies? What Future Do They See?

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Central banks worldwide are engaged in a forward-looking strategic layout aimed at regaining control of money in the digital economy era. Facing the rapid expansion of the private digital currency market—for example, stablecoin supply is projected to reach $305 billion in 2025—over 80% of central banks have already invested in research. This transformation has drawn high attention from media like Sina Finance. Central banks are not merely responding to challenges but sketching a data-driven, more resilient, and inclusive financial future.

Key Takeaways

• Central banks globally are actively researching digital currencies to seize monetary dominance in the digital era.
• Central bank digital currencies can help central banks execute monetary policy more efficiently, such as breaking the zero lower bound and delivering stimulus precisely.
• Central bank digital currencies provide safe digital cash, reduce payment costs, and address the trend of declining physical cash usage.
• Developing central bank digital currencies helps defend national monetary systems and combat financial crime.
• Central bank digital currencies can lower financial service barriers, help the unbanked, and promote payment market innovation.

Revolutionizing Monetary Policy: New Tools for the Digital Era

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Central bank digital currencies (CBDCs) are not just payment options in the digital age; they are more likely to become powerful tools for central banks to revolutionize monetary policy. Through unique CBDC designs, central banks will be able to execute policy operations previously unimaginable, responding to economic challenges more flexibly and precisely.

Breaking the Zero Lower Bound Possibility

Traditional monetary policy often faces the “zero lower bound” bottleneck during severe economic downturns. When central banks lower rates to zero, people can choose to hold physical cash to avoid negative interest rates, making it hard for central banks to further stimulate consumption and investment.

Central bank digital currencies offer a potential solution to this dilemma. In theory, central banks can directly apply small negative interest rates to digital currencies held by the public, encouraging spending or investing rather than leaving money idle in accounts. This effectively gives central banks a stronger stimulus tool during downturns.

However, this design also raises financial stability concerns. To address this, economists have proposed innovative models:

• Dynamic Stochastic General Equilibrium (DSGE) Model: Research shows that applying negative interest rates to CBDCs during downturns can effectively break the traditional zero lower bound constraint on deposit rates, enhancing central banks’ macro-control capabilities and avoiding the economy falling into a “liquidity trap.”
• Two-Tier Remuneration Approach: To protect the public and maintain financial stability, central banks can design a dual-track system. Ordinary citizens’ digital currency accounts can enjoy rates not below zero (like holding cash), while corporate or financial institution large accounts can be subject to negative rates. This balances policy effectiveness with social acceptance.

What is a Liquidity Trap? This is an economic concept where, when interest rates fall to extremely low levels, no matter how much money the central bank injects, people and businesses prefer holding cash over investing or consuming, rendering monetary policy ineffective.

Achieving Precise Stimulus Delivery

In the past, when governments issue economic stimulus subsidies, they often face inefficiency and unclear usage issues. Funds must pass through layers of banking systems, time-consuming and costly, and governments cannot ensure money reaches the most needed areas.

The “programmable” nature of central bank digital currencies will completely change this situation. Governments can directly embed specific instructions into digital currencies, ensuring funds are used under preset conditions.

• Set Usage Deadlines: To stimulate consumption, government-issued digital currencies can have expiration dates, forcing spending within a specific period and preventing fund hoarding.
• Limit Spending Scenarios: During crises, funds can be restricted to hardest-hit sectors, like dining or tourism, for precise relief.
• Simplify Distribution: Governments can send funds directly to citizens’ digital wallets, bypassing traditional banks, greatly improving administrative efficiency. This is especially important for countries with less developed infrastructure, as research shows well-functioning systems enable conditional cash transfer programs to have greater impact.

China’s mainland digital yuan pilots have already demonstrated this potential.

This case clearly shows programmable currency can effectively guide consumption behavior to achieve policy goals.

Gaining Real-Time Economic Data

Currently, central banks rely heavily on lagging economic indicators for policy-making, such as monthly consumer price index (CPI) or quarterly gross domestic product (GDP). These data are like driving while looking in the rearview mirror; decisions often lag real economic conditions.

Central bank digital currencies promise unprecedented real-time insight. Since all transactions are recorded digitally, central banks can observe macro-level fund flows while protecting individual privacy.

Central banks will shift from passive data recipients to active economic observers. By analyzing anonymized transaction data, central banks can instantly assess economic health instead of waiting weeks or months for statistical reports.

This means central banks can:

1. Instant Inflation Monitoring: Observe price fluctuations of specific goods or services to detect inflation pressure earlier.
2. Evaluate Policy Effectiveness: See consumption market reactions immediately after rate cuts or stimulus launches.
3. Track Money Velocity: Understand currency circulation speed in the economy to judge activity level.

With real-time data, central banks’ decisions will be more scientific and agile, taking action early in overheating or downturns, acting as more competent economic stabilizers.

Building Efficient Payments: Balancing Stability and Cost

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Besides serving as monetary policy tools, another core mission of central bank digital currencies is establishing a more efficient, resilient modern payment system. Central banks aim to provide the public with a stable, low-cost payment option while pursuing innovation.

Providing Risk-Free Digital Cash

Your bank deposits are essentially commercial bank liabilities. Though quite safe, they theoretically carry bank credit and liquidity risks. Central bank digital currencies (CBDCs are completely different; they are direct liabilities of the central bank, just like physical cash in your hand.

This makes CBDCs the safest form of digital currency.

This “risk-free” nature makes CBDC the best digital substitute for physical cash, providing the public with an absolutely safe store of value.

Reducing Corporate and Cross-Border Payment Costs

Current payment systems, especially cross-border payments, are cumbersome and costly. Funds pass through multiple intermediary banks, slow and expensive. Research shows global enterprises spend up to $120 billion annually on cross-border payment transaction fees.

Central bank digital currencies have the potential to completely change this. Using blockchain and other technologies, CBDCs can achieve peer-to-peer instant settlement, significantly reducing intermediary links. This will:

• Significantly lower corporate transaction costs.
• Speed up fund delivery.
• Improve overall payment system efficiency.

Responding to the Trend of Declining Physical Cash

With mobile payments’ popularity, physical cash usage rates are rapidly declining in many countries globally. For example, in the Eurozone, cash’s share in daily transactions has fallen from 68% in 2019 to 40%. This trend raises central bank concerns.

If physical cash disappears and all payments are controlled by private companies, this may bring new risks, such as payment system politicization or disruptions from system failures.

Therefore, even in highly digitalized countries like Sweden, governments are emphasizing the importance of ensuring public payment tools in crises. Central banks launching digital currencies aim to continue playing the role of public payment provider in the digital era, ensuring all citizens, including the unbanked, have a stable, reliable, and inclusive payment option.

Responding to Global Competition: Safeguarding Monetary Sovereignty

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In the digital era, currency competition is no longer limited to traditional forex markets. Privately issued global stablecoins and other countries’ central bank digital currencies (CBDCs) pose potential challenges to national monetary sovereignty. Therefore, central banks developing their own digital currencies is also a key layout to defend national monetary systems, ensure voice in the new global financial landscape, and layout future economic dominance. As closely followed by Sina Finance, the outcome of this race will profoundly affect international financial order for decades.

Defending National Monetary Systems

Historically, “dollarization” is not rare. Many countries, due to economic instability, see citizens turn to USD, causing central banks to lose independent monetary policy capabilities.

• Historical Lessons: From 19th-century colonial economies to 20th-century Latin America and post-Soviet economies in the 1990s, many regions experienced dollarization. Panama and East Timor even officially adopted it, gaining short-term stability but sacrificing monetary policy autonomy.
• New Threat in Digital Era: Now, this threat reappears as “digital dollarization.” If a country’s citizens widely use foreign USD stablecoins for savings and transactions, the national currency will be marginalized. This severely weakens the central bank’s lender-of-last-resort role and may trigger higher financial vulnerability.

Facing this, central banks are forced to consider countermeasures. Developing domestic CBDCs is to provide an attractive digital alternative, avoiding large-scale capital flows to foreign digital currency systems. However, this raises debates on government roles. The International Monetary Fund (IMF) warns that poorly designed CBDCs may suppress private financial sector innovation. US Fed Governor Christopher Waller also questions government competition with private companies without clear market failure.

What Role Should Government Play? Launching CBDCs to protect public interest or over-interfering in private-sector-led innovation? This becomes a core issue countries must carefully weigh when designing CBDCs. Sina Finance has repeatedly explored this dilemma.

Learning from International Experience: Sina Finance Observations

Global central banks are not working in isolation but closely observing each other’s progress and challenges. According to Sina Finance analysis, different countries’ pilots provide valuable experience.

China’s Mainland Digital Yuan (e-CNY) is one of the fastest-progressing globally, with large-scale pilots revealing many real challenges:

• User Adoption Barriers: Overcoming existing payment habits and addressing different age groups’ needs for security and convenience. Users’ cost of switching from existing tools (like Alipay, WeChat Pay) also significantly affects willingness.
• Technical and Ecosystem Integration: Strengthening cooperation with existing payment systems and financial institutions to increase market acceptance. Exploring hardware wallets, security chips, and other new applications is also key to expanding use cases.

Europe’s Response Strategy shows developed economies’ different considerations.

• Sweden: With cash usage falling below 10% in 2021, the Riksbank views the e-krona as fulfilling its duty to provide public money in a digital society, maintaining the state’s role in payment systems.
• Eurozone: The European Central Bank (ECB) promotes the digital euro to complement cash, lower merchant costs, and provide a foundation for private sector innovation. Sina Finance points out the EU’s Markets in Crypto-Assets Regulation (MiCA) is a clever strategic tool. The regulation imposes strict reserve requirements on stablecoin issuers, raising entry barriers for non-Euro stablecoins and buying time and market space for the digital euro or Euro stablecoins.

These international experiences show developing CBDCs is not just a technical issue but involves complex interactions of user psychology, market ecosystem, and regulatory strategy. Sina Finance observations highlight that countries are learning from these pilots to find development paths best suited to their national conditions.

Strengthening Financial Crime Prevention

Anonymous cryptocurrencies are often used for money laundering, ransomware, and other illegal activities, becoming regulatory gray areas. In contrast, the traceability of central bank digital currencies provides powerful tools for combating financial crime.

CBDCs have significant advantages in anti-money laundering (AML). Since transaction records are on digital ledgers, regulators can more effectively track fund flows.

Through these features, CBDCs help authorities combat money laundering, terrorism financing, and other illegal activities, building a safer financial ecosystem. However, Sina Finance also reminds us not to be overly optimistic. Just as credit cards brought card theft and digital payments brought online fraud, CBDC popularity may spawn new digital crimes. Criminals always find vulnerabilities in new technologies, meaning the cat-and-mouse game between regulators and technology will continue.

Practicing Financial Inclusion: Connecting the Unbanked

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Besides revolutionizing policy and payment systems, central bank digital currencies (CBDCs) bear an important social mission: practicing financial inclusion. Globally, many people remain excluded from modern financial systems; CBDCs have the potential to bridge them to financial services.

Lowering Basic Financial Service Barriers

Traditional financial services have invisible barriers. For people in remote areas or poor economic conditions, opening a bank account can be time-consuming and expensive. World Bank data highlights the severity:

• Globally, about 1.4 billion adults lack bank accounts.
• Even with accounts, up to 50% of adults are considered underbanked due to lacking credit cards.

Central bank digital currencies offer new possibilities for these people. One of its biggest breakthroughs is supporting offline payments. This design ensures people can still transact in areas with unstable networks or poor infrastructure.

Using Bluetooth or Near Field Communication (NFC) technologies, digital currencies can transfer directly between two phones or smart devices without going through banks or payment networks. This creates a digital experience similar to physical cash, significantly lowering the barrier to entering the financial system.

This feature not only helps include the unbanked but also enhances overall payment system resilience during disasters or facility failures.

Promoting Diverse Innovation in Payment Markets

Central banks’ goal in developing digital currencies is not to replace existing payment providers but to build an open digital public infrastructure (DPI). This infrastructure is like a digital highway on which private companies can develop various innovative applications.

Central banks can use open application programming interfaces (APIs) to make it easier for fintech companies and commercial banks to access the CBDC platform. This brings several benefits:

1. Lower Entry Barriers: Startups no longer need massive investment in underlying payment systems and can focus on developing customer-focused innovative products.
2. Stimulate Market Competition: More participants push existing institutions to improve service quality and lower fees, ultimately benefiting consumers.
3. Enrich Payment Choices: Merchants and consumers gain more diverse, convenient payment options, advancing the entire payment ecosystem.

By building an open, secure, and competitive environment, central banks provide fertile ground for private sector innovation, jointly creating a more flexible and inclusive financial future.

In summary, central banks worldwide are racing to research digital currencies not merely for technological catch-up. It is a far-reaching layout concerning national monetary sovereignty, financial stability, and future economic competitiveness. The future central banks see is a smarter, more efficient, and resilient new financial era.

• Enhance Efficiency and Inclusion: CBDCs are expected to [promote low-cost payments, increase financial inclusion, and stimulate private sector innovation](No citation provided).
• Strengthen System Resilience: Through wholesale CBDCs and distributed ledger technology (DLT), build more secure settlement systems.

Central banks are trying to shift from passive observers to active leaders in this transformation, laying a solid foundation for the future digital economy.

FAQ

What’s the difference between CBDCs and Bitcoin?

The two are fundamentally different. Central bank digital currencies (CBDCs) are issued by national central banks with sovereign credit backing and stable value. Cryptocurrencies like Bitcoin are decentralized with no sovereign credit support and highly volatile prices.

Will CBDCs completely replace cash?

The global mainstream central bank consensus is currently “no.”

CBDCs are positioned to complement cash, not replace it. They will coexist with physical cash long-term, providing one more safe, convenient payment option, especially ensuring payment system resilience in the digital era.

Will using CBDCs still have privacy?

Central banks adopt a “controllable anonymity” principle in design. This means ordinary small daily transactions can remain anonymous to protect personal privacy. Only in major illegal activities like money laundering or terrorism financing can law enforcement trace transactions through legal procedures.

Do I need a bank account to use CBDCs?

Not necessarily. One goal of CBDCs is financial inclusion, serving the unbanked. Through offline payment support and other technologies, people can transact directly between devices, significantly lowering financial service barriers.