ChatGPT may have stolen the spotlight, but central bank digital currencies are the innovation to watch
- Central banks across the world are responding to the challenge posed by the rise of decentralised finance by creating their own digital currencies
- Central bank digital currencies have the potential to revolutionise the global monetary system and give billions of unbanked or underbanked people access to finance
As central bankers grapple with the complexity of digital money, they have come to realise a new monetary system is already on the cards and could be close to reality. What will this new monetary system look like?
The Bank for International Settlements (BIS) is the de facto central bank of central banks. Its real function is to be the intellectual hub where central bankers analyse and discuss emerging challenges and issues.
Through the BIS Innovation Hub, central banks have been thinking through and piloting how the new monetary and financial system could work. The breakthrough was the realisation that money is not just conventionally thought of as a unit of value or means of payment but also a store of value.
Digital money is really a token, a standardised lump of information that contains not only data but also the rules by which the token can be exchanged for value. Money has transformed into a digital lump that contains your information as well as value. It can be transformed into complex instruments such as securities, so what if all such information and the rules by which it is packed can be traded through a standard token that can be exchanged through a global unified ledger?
How to unleash CBDCs’ potential without disrupting commercial banking
This global unified ledger is effectively the tech platform whereby everything is settled through CBDCs. This is enormously complex in design and execution, which means that most people would not understand how it works. But it promises to produce a trusted, transparent, efficient and resilient financial system that avoids scams and enables official oversight.
The latest BIS annual report suggests this infrastructure can be built by the private sector with CBDCs as the foundation token. In effect, CBDC tokens are the building blocks of a new world of digital money and finance. Notice that tools such as ChatGPT are hardly mentioned, because artificial intelligence is only another step on the journey to digital nirvana.
This is a lot for most people to process. The third chapter of the BIS annual report is a must-read since it sketches out the new monetary system’s foundational architecture. If this all sounds like an exaggeration, watch this space. Your financial future depends on it.
Andrew Sheng is a former central banker who writes on global issues from an Asian perspective