How to Prepare For CBDCs (Start Now)

As the overall level of digitization only tends to grow by year, the implementation of Central Bank Digital Currencies (CBDCs) across different countries is now just a question of time.

The example of Nigeria CBDC failure shows that businesses, let alone individual users, are not always eager to adopt such rapid changes. 

Yet, the advance of the new technology is inevitable. Local authorities that prefer to stay up-to-date with global trends surely understand the benefits of CBDCs and are already working out their own solutions.

How to prepare for CBDCs’ release? What should end-users and business owners be aware of before this wave hits and what they can do to smoothen the transition? Read on to find out.

Key Takeaways

• The idea to implement CBDCs first emerged in the 1990s, but only with the advance of blockchain, it has become possible to do that at scale.
• CBDCs make payments more efficient thanks to fast transactions at low fees. Also, they can make economies more stable and reduce overall cash usage.
• The disadvantages of CBDCs include increased governmental surveillance,  vulnerabilities to cyber attacks, and limited access offline.
• CBDCs can replace existing forms of money and reshape global finance. What’s worse, they can cause digital currency wars across different regions.
• To prepare for CBDCs, individuals should educate themselves about the new technology, keep track of the relevant news, and take care of their privacy and assets’ security beforehand.
• Businesses, in turn, should analyze the impact of CBDCs on each aspect of their operations, prepare the relevant IT infrastructure, and educate employees.

What is a CBDC?

The Federal Reserve defines CBDCs as digital liabilities of central banks made widely available to the general public. 

In simple terms, this is the form of digital money pegged to the value of the local currency and issued exclusively by Central Banks.

The term itself has been around for a while already. For example, the Central Bank of Finland first issued the Avant smart card for storing e-money in the 1990s. Yet, only with the advance of blockchain, the appropriate technical background for the whole enterprise has emerged. 

The implementation of CBDCs is a large shift in the technology and, at the same time, in our daily lives. Therefore, both businesses and individuals should know how to prepare for the rollout of the new payment solution.

Potential Benefits of CBDCs

CBDCs have several pros and cons:

As a digital currency backed by the most reliable source of power in any region, a CBDC comes with a number of distinct advantages:

• Faster transfers. One of the benefits that blockchain enthusiasts specifically boast of is the possibility to transfer value to any location in the world instantly. With the blockchain as the key technological background, CBDCs have this feature as well.
• More efficient payments. Aside from cross-border transactions, CBDCs could also be pretty useful in daily financial operations. With the possibility to transfer funds in a cheaper and faster manner, both businesses and individuals could profit from the innovation.
• Increased financial inclusion. With a reduced barrier to digital payments, CBDCs could help bring unbanked populations into the global financial system.
• Financial stability. Properly designed CBDCs could help central banks improve their oversight over payment flows and thus improve overall economic stability. This perk is only relevant for the times of prosperity, though. (We won’t recall the crisis of 2008 here and how large financial institutions failed us all. )
• Reduced cash usage. As a nice alternative to cash, CBDCs could reduce the costs associated with cash management by displacing some of the cash transactions.

In addition to these advantages, end-users may enjoy higher stability in comparison with cryptocurrencies. Authorities, for their part, can get better control over criminal activities.

All-in-all, the innovation looks promising in many aspects.

Risks and Drawbacks of CBDCs

Not everything is perfect, though, as there is a fly in the ointment for all the parties involved. The list of potential drawbacks and risks associated with CBDCs includes:

• Privacy concerns over data collection. When running on a private blockchain, CBDCs could contribute to the government surveillance of spending patterns and transactions of individuals. Moreover, as a centralized payment method, CBDCs could enable governments to block transactions for anyone they consider persona non grata. From this perspective, the new payment method is not too much different from traditional centralized payment solutions.
• Limited access offline. Since CBDCs are heavily dependent on complex IT systems, the lack of internet access may become a huge problem for those who use them. 
• Vulnerabilities to cyber attacks. When treated without due diligence in terms of cyber security, CBDCs may result in severe financial losses. Similar to CEXes or centralized DeFi bridges, these digital assets may also fall victim to theft, fraud, or systemic failures.
• Financial disintermediation. CBDCs could disrupt the commercial banking system if customers start moving their deposits in large amounts to the new digital wallets. As a result, the whole credit system may face problems as the banks’ lending capacity will be diminished.
• Financial instability. What’s more, end-users withdrawing their deposits from commercial banks at a large scale may negatively impact the overall economic situation, especially during times of financial stress.

Yet, it’s not as dark as it may seem to be as the correct approach to design choices may help to balance all these negative aspects.

Impact of CBDCs on the Global Economy

At the time of writing, the number of countries that have officially launched such a currency is still not very high. 

CBDC Tracker states that only 11 countries have a working CBDC with 21 more having the project at the pilot stage.

Yet, with digitization as a global trend, CBDCs may easily become a part of the brave new world to emerge. With all the benefits and counter-arguments mentioned above, here’s how this new arms race may impact the global economy.

CBDC Tracker: The adoption of the new technology moves along way too slowly.

Displace existing forms of money

As a digital form of money backed by the government, CBDCs represent a convenient and stable means of transferring value.

Combined with user-friendly applications, the new currency may appeal to banks and end-users and gradually replace cash and other payment methods.

Improve visibility for central banks

With the help of CBDCs, central banks could gain better visibility into payment flows, transactions, and consumer data.

As a result, their control over the economy will only grow while customer privacy will simply diminish.

Reshape global finance

With major economies introducing CBDCs, their dependence on dominant global reserve currencies such as US Dollar or Euro will decrease.

As the US gross external debt has already exceeded 25 trillion USD at the time of writing, CBDCs may have a significant influence on international trades and global cash flows.

Enable digital currency wars

Countries may exclude some regions from accessing their digital assets while giving preferences to others. Thus, CBDCs may turn into another geopolitical weapon giving advantages to those who have stronger technologies on their side.

How Individuals Can Prepare for CBDCs

The impact of CBDC implementation looks rather serious. So how to prepare for CBDC if you are a regular person and have no means to influence such important matters in your country?

Fears aside, there’s still something you can do to minimize the negative aspects and leverage the positive ones.

Learn about your country's CBDC plans and timeline 

Forewarned is forearmed. Find out if your country is going to implement digital currencies any time soon. If it is, check at what stage the project currently is and what is the ETA of its final release.

The aforementioned CBDC tracker is a nice tool to assist you here.

Educate yourself

For the new technology to get adopted smoothly, the authorities will likely do their best not to overwhelm regular citizens with its technical details.

Yet, it would be useful to understand the background of how CBDCs work and to get as knowledgeable about them as you can before the actual implementation.

Do your homework thoroughly. Study the technical aspects of the blockchain that the CBDC will be built upon. Find out what security measures are relevant for protecting your assets. 

Also, stay up-to-date with all the news concerning the project and closely monitor its failures and achievements.

Evaluate bank account and digital wallet availability 

Find out where you will be able to store the CBDCs. Check if the digital wallets provided by the Central Bank will have any integrations with other services such as banks or large merchants.

For example, the CBDC white paper released by the US government in January 2022 states that the US CBDC would function only within the current banking environment. Yet, those who still don’t have any accounts in the banks could rely on the diverse bank and non-bank CBDC intermediaries.

Consider privacy tools as CBDCs evolve

Finally, think ahead about how to protect your digital assets and how to maintain your privacy.

The blockchain industry is famous for the large hacks and thefts that mostly occur on CEXes and other centralized entities. Yet, the world of traditional finance suffers the same issues.

Thus, the reports claim that since January 2018, financial companies have suffered over 2,260 data breaches with the banking sector suffering the most.

Therefore, fully entrusting the safety of your digital funds and your data to a bank would be just as stupid as keeping all your bitcoins on a CEX. 

In the beginning, there will be little for the regular users to do about this problem. But as CBDCs evolve, central banks may introduce new measures for the citizens to improve their security further. So keep your eyes open for any updates in this area.

How Businesses Can Prepare for CBDCs

The impact of CBDCs on end-users won’t be very high, especially in regions such as Sweden and Denmark with ever-decreasing cash usage. Yet, with businesses that would be an entirely different story.

As Bill Gates said during the dotcom boom at the beginning of the century, if your business is not on the Internet then your business will be out of business. The same applies to every new technological innovation to come, CBDCs included.

Here’s how companies can prepare for CBDCs.

Analyze CBDCs’ impact on your business.

Entrepreneurs should thoroughly assess how the adoption of CBDCs will influence such aspects of their businesses as payments, taxes, compliance, etc.

If you run a small family-owned bakery shop serving a handful of loyal customers from the neighborhood, the impact will likely be not very high. 

For medium companies and enterprises, there will be a much bigger number of items to assess such as:

• Cash management processes
• Taxation
• Financial reporting
• Customer interactions
• Supply chain management
• Compliance
• etc.

There’s no doubt that the influence of CBDCs will be ponderable in each of these aspects. Therefore, thorough preparations may be helpful to withstand the changes.

Assess required software updates

Evaluate the costs associated with the implementation of the new technology. 

Updates on IT infrastructure usually require additional investments in both hardware and software. Find out if your current IT systems support the new payment method at all or if you will have to change your infrastructure entirely. 

Also, think about how you are going to integrate CBDCs into your e-commerce platform. Find out if your vendor offers any easy solution for this task. Alternatively, as the matters get more urgent, you may have to look out for a different tool.

Train your employees

Training your staff is another crucial step that you have to make while preparing for CBDCs’ integration. 

Knowledgeable employees will handle the innovation more smoothly and help your business switch to the new digital rails faster. 

To help them cope with the changes, you may prepare teaching materials yourself or hire a relevant specialist to conduct a series of training sessions.

Enhance your digital security

Since you cannot control the security of the IT infrastructure that CBDCs will be released upon, think ahead about what you can do on your side to improve your assets’ security.

Analyze if your current IT infrastructure has any potential weaknesses and think of how you can remove them. Such measures as 2FA, biometric authentication, encryption, and regular staff training should increase your security considerably.

Investing in hardware wallets for storing CBDCs may also be a good option to improve the security of your digital assets.

Final Thoughts

If you can’t stop the upcoming storm, the best you can do is to prepare thoroughly.

CBDCs may or may not get adopted in your region any time soon. Yet, even if your country is too prosperous to face any additional innovations now, there is no guarantee that new technology will never come knocking at your door - earlier or later.

Therefore, you should always keep your eyes open to new technological solutions and think of how to make the best use of them for the sake of your benefit.