The era of paper money might be on its last legs. By pouring fuel into debates about central bank digital currencies (CBDCs), the digital form of a government-issued currency, the coronavirus pandemic is accelerating acceptance towards their economical and everyday life implementation. Due to the changing payment landscape, voices calling for digital currencies are getting louder as more and more CBDC projects are globally shimmering below the surface. It is only a matter of time until they will become part of the new widespread reality that we will encounter eventually. 

So, what are CBDCs? They are not a form of cryptocurrency like Bitcoin and Ether. CBDCs are legal, fiat money — government-issued currency — in digital form by a country’s central bank, instead of being privately released by a decentralized ledger. The value of cryptocurrencies is solely determined by the market while CBDCs are monitored by monetary policy or trade surpluses. Different from electronic cash such as contactless debit cards, CBDCs are not just a representation of physical money but are an entire substitute for notes and coins. 

As face-to-face payment has sharply declined due to social distancing, governments are forced to look towards digital solutions. Benefits of CBDCs include price stability, monetary policy, an innovative competitive payment landscape, decreased risks of private money creation like stablecoins and efficient cross-border payments. 

How would a CBDC solution work? A clear consensus among global governments is not fully visible yet. The possibilities range from the traditional centralized system to blockchain technology implementation. In its simplest form, blockchain is an immutable record of time-stamped data (blocks), managed by a cluster of computers that are secured to each other via cryptographic principles (chains), without having a central authority. However, due to blockchain’s transparent nature, privacy concerns are raised. For instance, the lack of data immutability is not in alignment with the European Union (EU)’s General Data Protection Regulation that gives users the ability to delete personal information. 

Yet, the attributes of the Distributed Ledger Technology (DLT) might offer more advantages than the traditional centralized system. Even though the technology borrows features from blockchain, it is implemented as a private-permissioned network. In this regard, resilience and availability would be enhanced by its distribution and decentralization characteristics. Via cryptography, the CBDC platform would be secured. Furthermore, smart contracts would provide for programmable money. 

There has been an undeniable decisive shift in the landscape of payments in recent years. The duopoly of Visa and Mastercard payment cards has paved its way through the world. The Bank of England predicts that by 2028, only 9% of payments will be conducted via cash. Nordic countries with their long history of forefront innovations are even further along, as over half of Swedish retailers are expected to stop accepting cash as of 2025. Unsurprisingly, Sweden’s central bank Riksbank, announced its launch of their yearlong pilot project of e-krona at the end of 2019. Similarly, the tech hungry nations of Saudia Arabia and the UAE have joined forces for a cross-border digital currency initiative last year. 

While many governments and central banks waved aside and dismissed cryptocurrency, it was not until Facebook’s announcement of its controversial digital currency Libra, a form of a stablecoin backed by numerous currencies and short-term government debt obligations, that countries were forced to seriously address the question of who will be in control of money in the future. The EU feared that the growth of digital currencies could be a threat to the monetary sovereignty of governments. Yet, after struggling with immense resistance from global regulators and the departure of Libra founding members such as PayPal, Vodafone, Mastercard and eBay, Facebook announced last month that it will alter its approach toward a system with digital versions of established currencies as well as Libra. 

Admittedly, most CBDC projects are only in their cradle years. Still, a recently released survey by the Bank of International Settlements reports that 80% of its 66 participating central banks from around the world are researching CBDCs in experimental or proof-of-concept stages. It is worth mentioning, however, that the vast majority of the already-launched pilot schemes are in emerging markets. For instance, a year ago the Eastern Caribbean Central Bank initiated a blockchain-powered CBDC pilot.

Nonetheless, ever since the novel coronavirus started its vicious path to become a global pandemic, more and more central banks of developed countries have intensified their research on CBDCs.

The downside of paper money has become increasingly clear in the light of this pandemic as customer payment habits changed significantly. One major reason for this phenomenon is to be found in the most basic instinct of mankind: fear. Many users are afraid of potential coronavirus pathogens being transmitted by banknotes. In the U.S., the Federal Reserve has quarantined dollars from Asia prior to their recirculation out of caution. Similarly, China has disinfected its cash before redistributing it. However, not all digital payment options are contact-free, since most credit card payments require a code. This stands in contrast to CBDCs which function completely contactless. Additionally, social distancing and country lockdowns underline the need for digital online transactions. 

The U.S. has been one of digital currencies’ biggest critics. Hence, it came as a big surprise when a digital dollar and a digital wallet was discussed for the $2 trillion coronavirus relief bill by the U.S. House of Representatives. Even though the proposal was scrubbed, it shows that the idea of a digital dollar is in the minds of politicians. Shortly after, a draft bill by the U.S. Senate Committee on Banking, Housing and Urban Affairs echoed the digital dollar language from the draft and named the proposed digital dollar wallet “FedAccounts.” In January, another concept for a digital dollar was introduced by J. Christopher Giancarlo, also known as “Crypto Dad,” the former chairman of the Commodity Futures Trading Commission, who coined the Digital Dollar Foundation.

However, the digital dollar from the bills and from Giancarlo hold distinctive differences. The drafts’ digital dollar did not account for any innovation, as it would rely on the ordinary technology currently being used by the banks. Hence, it would be centralized by design. On the other hand, Giancarlo’s proposed digital dollar is based on the decentralized blockchain technology.

The People’s Bank of China just highlighted that its CBDC development is among its top priorities. The bank is cooperating with private companies such as Tencent and Alipay. Rumors of China being close to issuing a national digital currency were strengthened with Alipay reportedly publicizing five patents from January to March 2020 in regard to a digital currency. In light of other countries reevaluating the need for CBDC, South Korea’s central bank just launched a pilot program this April. Similarly, after Japan’s central bank announced the establishment of a CBDC research team in January of this year, Japanese policymakers submitted a proposal to the government only one month later. Likewise, in India, a digital rupee was advocated by the Indian National Institute on Smart Government this January. 

Even a digital euro might become a reality soon. The Banque de France launched a program calling for applications as of March 30, 2020, to experiment with the use of a digital euro. Resistance among the other EU member states comes especially from Germany, a country that is behind in terms of a digital revolution. Nevertheless, the European Central Bank has joined forces with the Bank of England, Bank of Canada, Swedish central bank Riksbank, the Swiss National Bank and the Bank of International Settlements to assess potential cases for CBDC in their respective home jurisdictions as of January 2020.

Additionally, in January of this year, the World Economic Forum (WEF) announced in Davos the establishment of the first Global Consortium for Digital Currency Governance. In the course of this, the WEF issued a CBDC policy-maker toolkit, highlighting the growing calls for digital currencies.

Notwithstanding the innovative progress, CBDCs have a dark side which entails profound privacy issues. While cash has always been the preferred instrument to secure anonymity, digital currencies leave a clear trail of conducted activities. State surveillance would automatically be heightened. Hence, it is of utmost importance to ensure that users exercise control over how their data is being used and with whom it is being shared. Nevertheless, one thing has become distinctively clear: A side effect of the coronavirus pandemic is an extreme, all-around increase in humanity’s data extraction. The price for data just went up. 

Yet, whether the pandemic-initiated hype of CBDCs will last even after the novel coronavirus has been defeated, thus potentially reducing fear-induced behavior changes, is only written in the stars. 

The regime of cash as king might be overthrown by the coronavirus pandemic. However, only time will tell how our new digital ruler will fare.