On 14 December 2023, Ripple released a 23-page report titled “CBDCs: The Digital Evolution of Money,” which provides a comprehensive analysis of the evolving role of Central Bank Digital Currencies (CBDCs) and stablecoins in the modern financial ecosystem. The report offers an insightful perspective on how these digital currencies are set to digitize economies and contribute to the Internet of Value.

The report notes that 130 countries, representing 98% of the global GDP, are actively engaged in CBDC projects. This includes a range of development stages, from exploratory phases in countries like the United States and South Africa to more advanced stages in the European Union and China. According to the Atlantic Council, most of the G20 countries are in advanced stages of their CBDC projects, with nations like Nigeria and the Bahamas already launching their solutions.

A survey conducted by Ripple shows that 85% of global finance leaders believe their countries will launch a digital currency within the next four years. They see financial inclusion as a primary benefit of CBDCs, along with enhanced national competitiveness, more efficient payment systems, and broad innovation.

The report references McKinsey’s analysis, indicating that CBDCs can help central banks achieve various systemic objectives, such as financial inclusion, fraud reduction, payment innovation, and new vehicles for monetary policy.

The Ripple report emphasizes the diverse functionalities that CBDCs offer. It highlights their role in expanding sovereign money reserves and countering some of the challenges faced by traditional bank money regimes. The report also discusses the significant positive impacts of asset tokenization, including the transformation of tangible assets into digital tokens on the blockchain.

In addition to efficiency in asset exchange settlements, the report points out the privacy and agility benefits of tokenization, which allows for peer-to-peer asset transfers without centralized intermediaries.

The report acknowledges that the deployment of CBDCs introduces new risks and challenges, such as increased centralization, regulatory oversight issues, and difficulties in reversing fraudulent transactions.

The International Monetary Fund (IMF) underscores the importance of balancing technological advancement with policy development for successful CBDC implementation. This includes developing legal frameworks and regulations, and collaborating with private firms for distribution.

Kristalina Georgieva, IMF Managing Director, said in 2022:

Introducing a CBDC is about finding the delicate balance between developments on the design front and on the policy front. Getting the design right calls for time and resources, and continuous learning from experience—including shared experiences across countries. In many cases, this will require close partnerships with private firms to successfully distribute CBDCs, build e-wallets, add features, and push the bounds of technology. But the policy aspects are also paramount, including developing new legal frameworks, new regulations, and new case law.

Last month, in an episode of Ripple’s YouTube series “Crypto in One Minute,” James Wallis, VP of Central Bank Engagements at Ripple, delved into the role of Central Bank Digital Currencies (CBDCs) in promoting global financial inclusion.

Before assuming his current position at Ripple, Wallis was the Vice President of Global Sales Strategy & Operations at the company, a role he held from May 2019 to January 2021. In addition to his duties at Ripple, in August 2018, Wallis established 7e4 LLC, a consultancy specializing in strategic advice and business consulting, particularly in blockchain, fintech, and Payments & Transaction Banking sectors.

Wallis started by defining financial inclusion, framing it as the worldwide issue of limited access to financial services. He identified people across various regions, including the US, Africa, and Asia, as being affected by this problem. The root causes, Wallis explained, are twofold: first, low income prevents establishing relationships with financial institutions, leading to a lack of credit history; second, the profit-centric approach of banks often excludes individuals with minimal financial resources.

Wallis underscored the transformative potential of CBDCs in addressing these barriers. He noted that the inherently lower costs associated with CBDCs could drastically reduce the expense of providing financial services, making them more accessible to those currently marginalized.

Wallis further highlighted that CBDCs could offer people basic payment options, which are essential in starting to build a credit history. This foundational financial step is critical for integrating a broader population into the financial ecosystem.

He also touched upon how CBDCs could open doors for individuals to obtain loans, a factor crucial for the growth and expansion of small businesses and entrepreneurs.

In his final comments, Wallis recognized the complexity and breadth of the topic, acknowledging the challenge of distilling years of discussions into a brief format. He expressed his enthusiasm for the potential of CBDCs to make a significant positive impact while also noting the limitations posed by the short duration of the segment.