Central banks of the future

Dora Heng
2 min readMay 5, 2021

As myriad aspects of our daily lives move from the analogue to the digital world, it is inevitable that our experience with money will also be transformed. Data has shown that cash as a percentage of the average US consumer’s total payments declining from 40% in 2009 to 30% in 2019[1]. It is expected that the usage of cash will continue to decline as a result of the pandemic — where we have not only seen a boom in e-commerce as consumers stay hunkered down at home, but also a greater preference for contactless payments during in person transactions to prevent the transmission of the virus.

While there are existing private sector options to digital payments/currencies such as credit cards, stablecoins, cryptocurrencies, digital wallets, we also need public intuitions to provide a form of trusted option in the form of Central Bank Digital Currency. According to the Bank of International Settlement survey from January 2020, 80% of central banks have reported to be working on central bank digital currency. CBDC allow the central bank to both retain sovereignty over their role in monetary policy, and promote competition within the modern payment system. Retail CBDC would essentially act as a digital fiat — a digital cash — that can be used in everyday retail transactions.

Money is not only a unit of account, a store of value, but most importantly for our discussion here, it also needs to be a medium of exchange. What is the use of cash if we cannot use it in our day to day transactions? Therefore, a key design principle that central banks need to consider for CBDC is the ability to be interoperable with current and new payment technologies.

There are many technological considerations that central banks can consider in the engineering of interoperable digital currencies — such as using distributed ledger technologies (DLT) to manage the movement of digital tokens, or the use of application programming interfaces (APIs) to connect banks with non-bank players such as payment service providers. Common data standards, such as ISO 20022, are critical in the design requirements for CBDCs to allow inter-account transactions.

If we think boldly around what the central banks of the future would look like, banks are no longer just money minting institutions, but they are critical providers of essential digital finance public infrastructure. Just as the federal government is in charge of constructing roads and highways and other public infrastructure for the real economy to function, so will the central bank need to play a critical role in building out digital infrastructures for interoperable payment solutions to grow the digital economy.

[1] https://www.retailcustomerexperience.com/articles/the-pandemic-and-cash-use-what-are-the-facts-2/



Dora Heng

Recovering economist passionate about global development and being human in an age of technological disruption