The digital finance landscape is undergoing a seismic shift as central banks push forward with central bank digital currencies (CBDCs) whilst private entities develop stablecoins as an alternative. According to the OMFIF report, "Global Progress on Central Bank Digital Currencies Despite Hurdles", 81% of central banks are actively exploring CBDCs, with 47% expecting to launch one within five years. The European Central Bank (ECB) and the Bank of England are advancing retail CBDC plans, whilst emerging markets such as Brazil and Ghana are leading blockchain-based pilots. Brazil’s central bank, for instance, is aiming to roll out its digital currency, DREX, by 2025, with three successful transactions already completed in its pilot program. And the push for change goes beyond innovation - it is about driving competition, increasing financial inclusion and making financial services accessible to all. The success stories of systems such as Kenya's M-Pesa, Brazil's PIX and India's UPI highlight the power of disruption to create opportunities. These platforms have transformed their markets and shown how competition can force traditional financial institutions to adapt, reduce costs and broaden their customer reach. M-Pesa, for instance, transformed mobile payments in Kenya, whilst PIX and UPI levelled the playing field, advancing financial inclusion to levels previously unseen.
Meanwhile, the banking sector is often known to fear disruption so leading to resistance, but evidence shows this fear is misplaced. Competition from new players has not injured banks, but rather strengthened them by broadening their reach and enhancing their relevance. As former deputy governor at the Central Bank of Kenya, Sheila M’Mbijjewe, states: “Being scared of having your business model interrupted is not the way to go” - the real issue is adapting to change. Banks must recognise that holding onto outdated models risks becoming obsolete as the financial ecosystem rapidly evolves. The question is not about whether to accept disruption, but how to turn it into an opportunity. With central banks pushing innovation, those who resist will fall behind whilst those who adapt will shape the future of finance. However, despite growing interest in CBDCs, stablecoins continue to offer a compelling alternative - the debate between CBDCs and stablecoins is about more than just digital currency issuance, it is about the future of money itself, financial inclusion and control over global financial flows. And a major catalyst for CBDC growth is the inefficiency of cross-border payments - hindered by high fees, delays and a lack of clarity. The Financial Stability Board (FSB) outlines four significant challenges: elevated costs, sluggish processing, limited access and transparency issues. For example, sending a $200 remittance globally incurs an average fee of 6.3%, and international wire transfers often take days to complete, hence the FSB aims to settle 75% of cross-border retail payments within one hour by 2027.
Source: Teamblockchain/ OMFIF Future of payments survey 2024
Notably, wholesale CBDCs, designed for institutional use, have gained traction as a solution with interoperability trials being underway such as Hong Kong’s mBridge project - its aim to improve international transactions. Deutsche Bank succinctly summarises the benefits of wholesale CBDCs as including faster settlement speeds and enhanced efficiency as well as security for securities settlement and cross-border payments. And unlike retail CBDCs, which raise privacy concerns and challenge traditional banking models, wholesale CBDCs could improve liquidity and efficiency without disrupting financial intermediaries. However, retail CBDCs (designed for everyday consumers) represent a more contentious proposition; governments and central banks promote them as modern financial tools that enhance inclusion and efficiency, yet critics highlight significant risks that could overshadow their potential benefits, particularly concerning privacy and disruption to traditional banking systems. Furthermore, the real-time transaction tracking feature of retail CBDCs is also raising privacy concerns - governments would have the authority to monitor payments, restrict them or reverse transactions instantly. And whilst some argue that this improves financial security, others see it as an overstep those risks infringing on personal privacy and freedoms.
Another issue with retail CBDCs is how they could disrupt the role of commercial banks - presently, banks handle retail deposits but CBDCs may allow consumers to deposit funds directly with central banks therefore bypassing traditional financial institutions. Certainly this could reduce liquidity for commercial banks, affecting their lending abilities and destabilising the financial system - it has been estimated that a digital Euro could costs banks in the EU €6.5 billion to €19.5 billion p.a. Little wonder that there is some resistance to seeing it introduction. “The two-stage banking system, consisting of a central bank as lender of last resort and commercial banks providing liquidity to the public, is widely regarded as the preferred monetary architecture. At the same time, bank runs due to a loss of trust in individual financial institutions, or the entire system must be avoided, as such incidents could lead to a collapse of the financial system. It is argued that a digital euro could increase the risk of bank runs and that managing such a systemic risk scenario could become more complicated if retail customers could easily switch to a safe asset like a CBDC, especially if the CBDC offers a positive remuneration, unlike physical cash.”(whose quote is this???????)
Lastly, many critics argue that retail CBDCs fail to demonstrate a clear use case. Much of the functionality attributed to CBDCs, such as quicker payments and improved financial inclusion, is already being addressed by digital payment solutions such as mobile money (e.g., M-Pesa, Brazil's PIX and India's UPI) and stablecoins - assuming that central banks are happy to see non-banks having an increasingly large share of the payments volume. Nonetheless, in the US it is highly unlikely that we are to witness a return prior to the National Banking system when 12,000 different banknotes were issued by state and private banks. Therefore, many consider retail CBDCs as a “solution searching for a problem” with stablecoins offering a more practical and decentralised alternative. In Part 2, we look at whether the future of money is to be seen as one of collision or co-existence. The battle between CBDCs and stablecoins is not simply about technology - it is about control, efficiency and financial inclusion. Central banks regard CBDCs as a way to modernise finance, yet concerns over privacy, banking disruption and public adoption remain unresolved. Meanwhile, stablecoins are already proving their value, offering faster, cheaper and programmable payments - but regulatory uncertainty could threaten their expansion.
This article first appeared in Digital Bytes (18th of February, 2025), a weekly newsletter by Jonny Fry of Team Blockchain.