We regularly get one question: what are the real use cases for a CBDC?  We move and exchange money in many cases through digital mediums today.  What can CBDCs add that we can’t do in the current system? CBDCs can create some very specific use cases for the exchange of value, including:

Financial Inclusion

CBDCs can help address the issue of financial exclusion by providing individuals and businesses with access to digital payment infrastructure without the need for a traditional bank. It can enable people who don't have access to traditional banking services to participate in the digital economy and make secure and convenient digital transactions.

1. Accessibility: CBDCs can be accessed using basic smartphones or other devices without a traditional bank account. This means that individuals who lack access to physical bank branches can still participate in the digital economy and make electronic transactions. Simpler mechanisms such as mag-stripe cards and QR codes can also enable payments and deposits with a wallet.

2. Low Entry Barriers: Traditional banking often requires minimum balance requirements, account fees, and other costs that can be prohibitive for low-income individuals. CBDCs can eliminate these entry barriers, making it easier for people with limited financial resources to engage in the formal financial system.

3. Lower Transaction Costs: CBDCs can enable low-cost or even fee-less transactions, encouraging individuals to use digital payment methods rather than relying on cash, which can be expensive to handle and transport and can be easily lost or stolen.

4. Financial Services for the Unbanked: CBDCs allow individuals without traditional bank accounts access to essential financial services, such as making payments, saving money, and receiving government benefits or wages directly into their CBDC wallets.

5. Cross-Border Remittances: For populations that rely on remittances from family members working abroad, CBDCs can streamline cross-border payments, reducing the cost and time associated with transferring funds across borders. Wallets can be designed to hold multiple currencies, and simple mechanisms for exchange and conversion between CBDCs will simplify cross-border money transfers.

6. Financial Identity: CBDCs can be linked to a unique digital identity, making it easier for individuals without formal identification documents to access financial services. This can also help in areas where physical documentation is challenging or unavailable.

7. Innovation and Competition: The introduction of CBDCs can spur innovation in the financial sector, leading to the development of new and more inclusive financial products and services that cater to the needs of underserved populations.

8. Disaster and Crisis Management: In natural disasters or emergencies, CBDCs can provide a quick and secure means of distributing aid and financial assistance to affected individuals, bypassing physical infrastructure disruptions.

9. Empowerment of Women: In societies where women have limited access to financial resources or are excluded from traditional banking, CBDCs can empower women to control their finances independently and participate more actively in economic activities.

10. Data Analytics for Targeted Services: CBDC transactions leave a digital trail, which can be analyzed to gain insights into the financial behaviour of underserved populations. This data can help policymakers and financial institutions design targeted programs and services to address specific income needs.

Payment Efficiency and Cost Reduction

CBDCs can streamline payment processes, reducing intermediaries and associated costs. Real-time settlements can be achieved, enhancing the speed and efficiency of transactions within the financial system. It can reduce costs for individuals and businesses by eliminating fees associated with traditional payment methods.

1. Instant Settlements: CBDCs allow for real-time or near-instantaneous settlement of transactions. Traditional payment systems often involve intermediaries and clearinghouses, leading to delays in processing. With CBDCs, payments can be settled directly between parties, reducing the time for transactions to clear.

2. 24/7 Availability: CBDCs can operate 24/7, unlike traditional banking hours, which typically have limited transaction processing times, especially for cross-border payments. This constant availability improves the speed and efficiency of payments and supports the growing demand for round-the-clock global transactions.

3. Lower Transaction Costs: By eliminating intermediaries in the payment process, CBDCs can reduce transaction fees. The absence of third-party processors or clearinghouses helps lower payment processing costs, making transactions more affordable for businesses and individuals.

4. Cross-Border Transactions: CBDCs can facilitate cross-border transactions without the need for currency conversions and costly foreign exchange intermediaries. This feature streamlines international payments, making them faster and cheaper.

5. Microtransactions and Micropayments: CBDCs can enable cost-effective microtransactions and micropayments, allowing for the exchange of very small amounts of money. This can benefit various industries, such as digital content providers, IoT (Internet of Things) devices, and sharing economy platforms.

6. Reduced Fraud and Counterfeiting: CBDCs incorporate advanced security features, making them more resistant to counterfeiting and fraud. This can help reduce financial losses due to illegal activities and enhance overall payment system security. These controls and consumer protections will make it quicker and easier for agencies to recover funds lost to fraudulent transactions.

7. Transparency and Auditability: CBDC transactions are recorded on a distributed ledger or blockchain, providing a transparent and immutable record of all payments. This enhances auditability and accountability within the payment system.

8. Integration with Smart Contracts: CBDCs can be integrated with smart contracts, enabling automated, self-executing transactions based on predefined conditions. This feature can streamline complex payment processes, such as escrow services and conditional payments.

Monetary Policy and Financial Stability

CBDCs can give central banks more direct control and insight into the flow of money within the economy. It allows for more efficient implementation of monetary policy measures, such as adjusting interest rates or influencing the money supply. CBDCs can enhance financial stability by providing better monitoring tools and reducing the risks associated with cash usage and informal economies.

1. Interest Rate Transmission: CBDCs can affect the transmission of interest rate policies by providing central banks with a more direct and effective tool for influencing interest rates. By offering CBDCs, central banks can set the interest rate on reserves held by commercial banks, directly influencing the overall interest rate environment and credit conditions.

2. Enhanced Monetary Policy Implementation: CBDCs enable more precise control over the money supply and financial conditions. Central banks can fine-tune monetary policy by directly affecting the demand for and supply of CBDCs, allowing for a more efficient implementation of monetary policy tools.

3. Financial Stability Monitoring: CBDCs provide central banks with more real-time data on transactions and economic activity. This improved data granularity can enhance the central bank's ability to monitor financial stability and detect potential risks in the financial system.

4. Lender of Last Resort: CBDCs can enable central banks to act as lenders of last resort more effectively. In times of financial stress, the central bank can provide liquidity support directly to financial institutions through CBDCs, ensuring the financial system's stability.

5. Payment System Resilience: CBDCs can enhance the resilience and efficiency of payment systems by providing a safe and secure digital means of settlement. Settling transactions in CBDCs can reduce the risk of settlement failures and counterparty risk, contributing to overall financial stability.

6. Increase Economic Influences: Central banks are extremely limited in their options for influencing economic activity and inflation within the economy. Moving a macro interest rate is their only direct influence beyond policy and bank directives. Allowing CBDCs to have the option of being interest-bearing means the central banks could derive more targeted controls on spending and lending. Making CBDCs held in individuals' wallets gain interest could slow consumer spending. Making CBDCs held in corporate wallets have negative interest could spur corporate spending. The possibilities to influence spending and boost economic activity are endless.

7. Control of Currency Issuance: CBDCs give central banks direct control over digital currency issuance, reducing the reliance on private digital currencies that may pose regulatory challenges. This allows central banks to maintain their role as the sole issuer of legal tender. CBDCs also don't carry the expense of printing, transporting and destruction that physical currency requires. This means the seigniorage investment on minted digital currency can be used to back the value of the digital currency directly.

8. Reduced Dependence on Physical Cash: CBDCs can gradually reduce the dependence on physical cash, making it easier for central banks to implement negative interest rates if necessary. Negative interest rates can be more challenging to implement with physical cash as it provides an alternative store of value outside the banking system.

9. Currency Substitution and Exchange Rate Management: CBDCs may influence currency substitution patterns in international transactions. Depending on how CBDCs are used and regulated, they could impact exchange rates and international monetary dynamics.

10. Macroprudential Policy: Macroprudential policy is a set of financial policies aimed at ensuring the stability of the financial system as a whole to prevent substantial disruptions in credit and other vital financial services necessary for stable economic growth. CBDCs can provide central banks with additional tools for implementing macroprudential policies to prevent systemic risks and promote financial system stability.

Cross-Border Payments and Remittances

CBDCs can facilitate faster and cheaper cross-border transactions. They can potentially eliminate the need for intermediaries, simplify compliance processes, and reduce settlement times. CBDCs can make remittances more accessible and affordable for individuals sending money across borders, benefiting both individuals and businesses.

1. Faster Settlements: CBDC transactions can be settled in real-time or near-instantaneously, eliminating the delays associated with traditional cross-border payment systems, which often involve multiple intermediaries and clearinghouses.

2. 24/7 Availability: CBDCs can operate 24/7, unlike traditional banking hours, which can delay cross-border transactions. This constant availability allows for round-the-clock global transactions, reducing the time to complete cross-border payments.

3. Reduced Intermediaries and Costs: CBDCs facilitate direct peer-to-peer transactions between parties, reducing the number of intermediaries involved and, consequently, the costs associated with cross-border payments. This can lead to more cost-effective remittances for both senders and recipients.

4. Currency Conversion Efficiency: CBDCs can potentially enable seamless currency conversions, removing the need for multiple currency conversions in cross-border transactions. This feature can save costs and reduce the complexity of international payments.

5. Enhanced Transparency: CBDC transactions are recorded on a distributed ledger or blockchain, providing transparency and traceability for cross-border payments. This transparency can help detect and prevent fraudulent activities and ensure compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.

6. Financial Inclusion for Remittance Recipients: CBDCs can improve financial inclusion for recipients of remittances in developing countries or regions with limited access to banking services. Individuals can receive and store CBDC funds in digital wallets, promoting financial access and digital financial literacy.

7. Interoperability and Standardization: As CBDCs are built on blockchain or distributed ledger technology, they can enable greater interoperability and standardization among different payment systems, facilitating cross-border transactions between different CBDCs.

8. Central Bank Cooperation: CBDCs can be used in bilateral or multilateral agreements between central banks, streamlining cross-border payments and fostering stronger financial ties between nations.

9. Automated Compliance and Reporting: CBDCs can incorporate smart contract functionalities that automatically enforce compliance with cross-border payment regulations, reducing administrative burdens for financial institutions and improving regulatory oversight.

10. Efficient Aid and Humanitarian Disbursements: CBDCs can be used in humanitarian efforts to disburse aid efficiently and financial assistance to recipients in times of crisis or natural disasters, ensuring timely and transparent delivery of funds.

Counteracting Cryptocurrencies and Stablecoins:

CBDCs can provide a regulated and controlled alternative to private cryptocurrencies and stablecoins. By offering a government-backed digital currency, central banks can maintain their role as money issuers and ensure compliance with regulations. CBDCs can help mitigate the risks associated with unregulated digital currencies, such as money laundering, terrorism financing, and consumer protection.

1. Government Backing and Stability: CBDCs are issued and regulated by the central bank and are typically backed by the full faith and credit of the government. This backing gives users a high level of stability and confidence compared to cryptocurrencies and stablecoins, which often lack such guarantees.

2. Legal Tender Status: CBDCs are usually considered legal tender, meaning they must be accepted as payment for goods and services. CBDCs have a distinct advantage over cryptocurrencies, which may not be widely accepted for everyday transactions.

3. Reduced Volatility: Cryptocurrencies like Bitcoin are known for their extreme price volatility. CBDCs, on the other hand, are designed to be stable and tied to the value of the national currency, making them more suitable for everyday transactions and as a store of value.

4. Regulatory Oversight: CBDCs are subject to rigorous regulatory oversight by the central bank and other financial authorities. This ensures compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations, consumer protection laws, and other financial regulations. Cryptocurrencies and some stablecoins, on the other hand, often operate more decentralized and less regulated.

5. Protection against Illicit Activities: CBDCs can incorporate features to prevent illicit activities, such as transaction monitoring and identity verification. This can help mitigate concerns regarding using digital currencies for illegal purposes, which have been associated with certain cryptocurrencies.

6. Integration with the Existing Financial System: CBDCs can seamlessly integrate with the existing financial infrastructure, allowing for smoother adoption and interoperability with traditional banking systems. This integration can make CBDCs more appealing to businesses and financial institutions.

7. Government Control and Monetary Policy: CBDCs give central banks more direct control over monetary policy and the money supply. This control can be important during economic uncertainty or crisis, allowing for more targeted interventions to stabilize the economy.

8. Support for Financial Inclusion: CBDCs can promote financial inclusion by providing access to digital financial services to individuals who may not have access to traditional banking. This aspect addresses concerns about exclusion from the financial system that some cryptocurrencies and stablecoins may not fully address.

9. Consumer Confidence: CBDCs issued by the central bank are likely to enjoy a higher level of consumer confidence than private cryptocurrencies and stablecoins, as the government's authority and credibility back them.

Enhanced Data and Analytics

CBDCs can provide central banks with more granular data and insights into economic activity. CBDCs enable better monitoring of transactions, allowing for improved economic analysis and decision-making. Central banks can utilize this data to better understand spending patterns, economic trends, and financial risks.

1. Real-time Transaction Data: CBDC transactions are recorded electronically, providing real-time data on payment activities. This data can monitor economic activities, consumer spending patterns, and overall transaction volumes, allowing for more timely and accurate economic analysis.

2. Granular Transaction Data: CBDCs allow more granular data collection than traditional cash transactions. Each CBDC transaction can be easily tracked, providing detailed information on the size, frequency, and types of transactions conducted by individuals and businesses.

3. Improved Economic Indicators: With real-time and granular data, central banks and policymakers can construct more accurate economic indicators, such as consumer spending indices, inflation measures, and monetary velocity, enabling more informed and data-driven decision-making.

4. Financial Market Monitoring: CBDCs can enhance the monitoring of financial markets by providing transparency into the movement of funds and asset holdings. This visibility can help identify potential risks or anomalies in the financial system.

5. Enhanced AML and CTF Compliance: CBDCs can incorporate features to facilitate Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) compliance. Transaction data can be analyzed to detect suspicious activities and ensure regulatory compliance.

6. Real-time Economic Monitoring: CBDCs can enable real-time economic monitoring, allowing central banks to respond swiftly to economic developments, such as changes in consumer behaviour, market volatility, or potential financial crises.

7. Policy Effectiveness Assessment: CBDC data can be used to evaluate the effectiveness of monetary and fiscal policies more accurately. Policymakers can observe how changes in policy impact CBDC transactions, helping them fine-tune interventions.

8. Smart Contracts and Automated Reporting: CBDCs can be integrated with smart contract capabilities, enabling automated reporting and compliance mechanisms. This reduces the administrative burden on businesses and financial institutions while improving regulatory oversight.

9. Open Data for Researchers: In some cases, central banks may provide anonymized and aggregated CBDC transaction data for research purposes. This can facilitate academic studies and private-sector analyses to gain insights into economic trends and behaviours.

10. Privacy Considerations: While CBDC transactions provide valuable data, privacy concerns must be addressed. Central banks must balance using transaction data for analysis and protecting individuals' privacy rights. In most cases, transactional details can be utilized while anonymized from the specific individuals involved in the transactions.

Crisis Response and Contingency Planning

CBDCs can be instrumental during times of crisis or emergencies. In situations where physical cash may be unavailable or impractical to distribute, CBDCs can serve as an alternative means of payment. They can help maintain economic stability, ensure access to funds, and support recovery efforts.

1. Quick and Direct Fund Disbursement: During a crisis or disaster, CBDCs enable central banks to swiftly distribute funds directly to individuals and businesses without relying on intermediaries. This can expedite financial assistance, ensuring timely support to those in need.

2. Real-time Monitoring: CBDC transactions are recorded electronically, allowing central banks to monitor economic activities in real time during crises. This real-time monitoring provides insights into the impact of the crisis on economic indicators, enabling more informed decision-making.

3. Remote Accessibility: CBDCs can be accessed remotely through digital wallets, making them accessible to individuals in disaster-affected areas with limited access to physical bank branches or cash. Low-tech and offline capabilities will make it easy to continue financial activity even when significant infrastructure has been damaged.

4. Transparent Aid Distribution: CBDCs can be used for transparent and accountable aid distribution. Transactions are recorded on a distributed ledger, ensuring the traceability of funds and reducing the risk of mismanagement or corruption. A relief agency can direct funds straight into an affected individual's wallet.

5. Seamless Cross-border Assistance: For international crises, CBDCs can facilitate cross-border assistance by enabling direct and instant transactions between central banks. This can streamline the provision of financial aid from one country to another.

6. Financial Inclusion during Disasters: CBDCs can promote financial inclusion during disasters by providing access to digital financial services, even in areas with disrupted physical infrastructure.

7. Automated Smart Contracts: CBDCs can incorporate smart contracts that automate certain processes based on predefined triggers, such as conditional aid disbursements. This feature can streamline aid distribution and contingency planning.

8. Improved Data for Contingency Planning: CBDCs generate data to inform better contingency planning for future disasters. Analyzing transaction patterns during crises can help identify vulnerabilities and design more effective response strategies.

9. Liquidity Support for Financial Institutions: CBDCs can be used as a tool for central banks to provide liquidity support to financial institutions during financial stress, helping stabilize the banking system and avoid systemic risks.

10. Reduced Dependency on Physical Cash: In disaster scenarios where physical cash distribution becomes challenging, CBDCs offer an alternative digital payment solution that can be used seamlessly.

Please bear in mind that the specific use cases and features of CBDCs can vary depending on the country and its objectives. Each central bank will have its priorities and considerations when designing and implementing a CBDC, tailoring it to meet the unique needs of its economy and financial system.