Are CBDCs 2.0 the future of cryptocurrencies?

Digital currencies, like cryptocurrencies, are changing the way individuals make their transactions. By combining cryptocurrency benefits (disintermediation, high speed, and low cost of transactions) with those of fiat currencies (price stability and being able to act as legal tender), they may challenge the traditional financial system. While first-generation digital currencies may only grant incremental changes such as the reduction in money movement prices and lowering the cost of capital for unbanked, adoption across nations through Central Bank Digital Currencies (CBDCs) 2.0 may supply a great added value to first-movers.

In a recent work, published by, Igor Mikhalev and Kaj Burchardi, two BCG experts of blockchain and cryptocurrencies, have analyzed key notable projects and developments around digital currencies, classifying them into key archetypes.

“CDBC 2.0 – the two authors wrote – is the second step in the evolution of CBDCs: a new, most impactful form of money issued digitally by central banks using blockchain technology, interoperable and programmable by design.

Currently, the responsibility for the monetary system lies under the jurisdiction of nation-states and international agreements. For a digital currency to be adopted in any state, it must first comply with the regulations of the state. Central banks are wary of digital currencies that introduce decentralization of ownership or governance, and that makes traditional centralized governance a challenging task.

But CBDCs will fail if they don’t implement and benefit from arguably the most revolutionary aspect brought by Bitcoin and blockchain technologies: decentralization. Initial CDBC projects create incrementally better alternatives to the current financial system by enabling peer-to-peer transactions, but they are still keeping the governance centralized and circulation controlled.

The major incentives for consumers to adopt a central bank-issued cryptocurrency will be based on decentralized governance and open circulation system. Public trust in government and banking institutions has dropped since the 2008 financial crisis. Therefore, there is room for a digital currency that has no central authority in its usual central bank sense which determines e.g. the borrowing rate or supply of money.

Central banks wield a high level of power over national currencies. Average consumers have no influence over or knowledge of central bank activities or which parties are asserting influence over policy decisions.

A CBDC 2.0 will be issued and decentrally governed either on a national or on a supranational level, across multiple jurisdictions. This implies a different set of legal, monetary, and fiscal policies, some of them automated, required to be codified and put in place across nations.

CBDCs 2.0 will supplant the need for multiple other digital currencies intended for specific use cases such as mortgages, lending, trade finance, real estate, and so on. They will have to be interoperable on a protocol level. Data exchange and functionality should be easily accessible and transferable from protocol to protocol.

Decentrally governed CBDC 2.0 will bring multiple advantages for an average consumer, including fast and cheap cross-border transactions, pseudonymity, personal data protection, and international operability. It will arguably eliminate the risk of hyperinflation because issuance will be automated via an algorithmic “issuance system.” All the transactions will be recorded on an immutable (supra) national ledger open to everybody, with no risk of double spending and reduced chance of illicit transactions.

Banks will have easier access to credit, meaning the money will move through channels faster. Cross-border transactions will require less documentation and time to settle. This will enable faster trade across the world and disempower monopolies. And traceability will allow nations to reduce criminal activities such as money laundering, tax evasion, and drug trafficking.

Last but not least, the currency will be interoperable on a supranational level, meaning that emerging economies could suffer less from purchasing power inequality.”

The interesting thing is that the two authors asked some people to list the benefits of decentralized CBDCs. Respondents gave the following answers. First, that CBDCs could improve democracy and distribution of power, and reduce political influence on decision-making. Secondly, they could reduce currency volatility, particularly in emerging economies. Finally, they could cut the cost payments, notably cross-border.

“Central banks are centralized institutions, and with a good reason. They have been created as independently governed bodies and entrusted significant power, to ensure long-term financial stability. This approach worked for centuries, limiting a national leader’s ability to debase the currency and ultimately contributed to grant financial stability. But now, as blockchain matures, leaders should decide how to restructure existing financial institutions and policies to benefit from decentralization of governance and subsequently realize the discussed benefits introduced by CDBC 2.0. First-movers will be rewarded by an increase in competitiveness of their (supra)national currencies through improved democracy and distribution of power, reduced corruption and manipulation as well as more efficient and secure payments”, the two authors concluded.

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