Central bank currencies need public chains to spur innovation

Central bank digital currencies are inevitably primed to be a principal medium of exchange in our lifetimes.

From China to the Bahamas, almost every central bank has its sights on creating digital currencies to compete economically on the global stage. But innovation is sorely lacking. At present, these CBDCs represent little more than a trivial upgrade to physical currency. But by allowing access to public chains, CBDCs could render much greater, and even revolutionary, functionality.

CBDCs, even in their current state, hold countless advantages. Chief among them is the ability to improve cross-border transfers, both in terms of efficiency and mitigating costs, and eliminating unnecessary intermediate links.

These novel financial instruments also promise to enhance the transmission of monetary policy and promote financial inclusion by eliminating the obligation for a traditional bank account and generally remodeling financial infrastructure to better support unbanked individuals.

Moreover — perhaps most important — CBDCs are likely to remove existing pain points in our outmoded financial system, namely bypassing expensive and inefficient legacy systems such as Swift.

But they're capable of so much more. Coupling innovations in the blockchain private sector with the backing of central banks, CBDCs could become more than just leveled-up digital iterations of physical fiat. All that would be required to leverage some of the more competitive elements brought forth by the cryptocurrency sector would be a partnership between central banks and public or private chains.

This notion isn't as far-fetched as it seems. In a recent webinar Bank of England analysts working on the central bank's CBDC project suggested that private companies could have a role in the distribution.

The People's Bank of China has already pivoted toward private company involvement, allowing commercial banks to issue its digital currency, DCEP. DCEP's two-tiered system allows for this level of collaboration.

In fact, instead of simply crowding out existing payments systems and companies such as Tencent and Alibaba, the PBoC has onboarded both, providing them their own roles in the new economic order.