Dashboard Investments Portfolio Insight Fund Compare Viewpoints Resources About us Non-U.S. investors LOG IN What are CBDCs⁠—central bank digital currencies? November 22, 2021 CBDCs, or central bank digital currencies, are developing forms of regulated, government-issued electronic money. Like cryptocurrencies, CBDCs are emerging from blockchain technology, but unlike a cryptocurrency such as Bitcoin, a CBDC will be backed by its issuing government and could more comprehensively replace traditional forms of cash. As digital currencies have rapidly proliferated in the private sector, with Bitcoin and Ethereum as two noted examples among a sizable and growing population of other cryptocurrencies, governments have begun to carefully evaluate—and some have already issued—CBDCs to replace their national currency. With entities such as the World Economic Forum issuing CBDC tool kits for policymakers and a consortium of academics, nonprofits, financial institutions, and governments developing pilot programs for CBDCs, the race toward widespread digital currencies is on. Central bank adoption of CBDCs is moving beyond experimentation Source: Bank for International Settlements (BIS) survey, 2021. A brief history of CBDCs The Bahamas became the first nation to introduce a CBDC widely with the launch of Sand Dollar in October 2020. As of October 2021, there were ongoing CBDC pilots preparing for a possible launch in 26 jurisdictions. Overall, 81 countries representing over 90% of global GDP were engaged in some way with CBDCs. Nigeria became the first African country to launch a digital currency, the eNaira, in October 2021. Meanwhile, China’s state-sponsored digital currency, the digital renminbi (or e-CNY), is being developed with cross-border use. The People’s Bank Of China (PBoC), the country’s central bank, defined e-CNY as “the digital version of fiat currency issued by the PBoC and operated by authorized operators. It’s a value-based, quasi-account-based and account-based hybrid payment instrument, with legal tender status and loosely coupled account linkage.” In a recent white paper, the PBoC noted “improvement of cross-border payments” as a key objective. The United States currently has two CBDC initiatives under way. The first is led by the Federal Reserve Bank of Boston in collaboration with the Massachusetts Institute of Technology, while the other is led by The Digital Dollar Foundation and Accenture. In late September, U.S. Federal Reserve (Fed) Chair Jerome Powell said that the Fed is “working proactively to evaluate whether to issue a CBDC and, if so, in what form.” He added: “I don’t think we’re behind. I think it’s more important to do this right than to do it fast.” But the urgency to act isn’t lost on the Fed. In May, Governor Lael Brainard said, “Given the potential for CBDCs to gain prominence in cross-border payments and the reserve currency role of the dollar, it is vital for the United States to be at the table in the development of cross-border standards.” What are the potential benefits and risks of CBDCs? As alternatives to traditional forms of fiat currency, CBDCs are issued by a central bank and are intended to provide government-backed digital currency that can facilitate safe, direct, and instant transactions—bypassing more heavily mediated conventional pathways—and can be stored in a central bank wallet situated outside the private banking system. Hailed by some as a promising path to financial democratization for populations with little to no access to traditional bank platforms for financial transactions, CBDCs’ potential benefits and risks are under close investigation for their transformative economic potential. Citing a variety of positive benefits, researchers at the World Economic Forum’s Digital Currency Governance Consortium (DCGC) have outlined three areas of risk and opportunity for CBDCs. The Digital Currency Governance Consortium sees three broad issue areas for CBDCs Source: World Economic Forum Digital Currency Governance Consortium, January 2021. As the DCGC has discussed, each issue area—technology, regulation, and the value proposition for unbanked or underserved populations—should prompt extensive testing, data collection, and deliberative evaluation. The potential benefits of CBDCs The potential advantages of central bank digital currencies may well depend on the economic situation within the country. The International Monetary Fund cites several potential benefits: Cost efficiencies: Thanks to their digital nature, CBDCs could make payment systems more cost-effective. This is true especially for geographically large countries, where the management and distribution of physical cash can be quite expensive. Financial inclusion: In some countries, large percentages of the population don’t deposit their savings in banks. CBDCs could promote financial inclusion among these unbanked populations by giving them access to a safe place for their savings and, eventually, access to credit. Cross-border transactional efficiencies: CBDCs could improve cross-border payments, which can be slow, expensive, and often not easily accessible. Instead of long payment chains between multilayered correspondent banks, CBDCs could be traded directly, if they share the same technical standards, data, and compliance requirements. The potential disadvantages of CBDCs There could be some limitations and drawbacks to CBDCs as well. Some of the risks include: Privacy issues: CBDCs may pose a threat to privacy. The central authority that will be responsible for collecting and distributing identification and transaction data will have access to all monetary transactions. In addition to the threat of central banks disallowing or curbing transactions between citizens, the data could be vulnerable to hacks or misuse, if leaked. Regulatory hurdles: Some of the legal and regulatory issues related to CBDCs still need to be figured out. These issues could lead to long-term delays in the execution of cross-border payments. Banking sector disruption: CBDCs could lead to banking sector disintermediation, such as mass withdrawals of wealth, if people decide to hold CBDCs in large numbers. To prevent such an occurrence, banks may need to offer higher interest rates on deposits or improved payment services, which could lead to smaller profit margins. How are CBDCs different from cryptocurrencies? Cryptocurrencies are a reaction to government regulation of fiat currency or money. For example, with Bitcoin’s decentralized blockchain technology, there’s no central entity in charge of financial transactions that’s able to regulate its use, stabilize its value, and influence its continuing development. CBDCs are government issued and, therefore, will work with centralized blockchain technology, in which only a few entities such as central banks can access or alter the blockchain. These central entities will have the power to decide who has access to the blockchain and to what extent. Cryptocurrencies are sometimes created with limits, which also helps add to the perceived value, essentially tying it to the fact that supply is limited. For example, the inventor of Bitcoin, Satoshi Nakamoto, capped the number of Bitcoins at 21 million, meaning there will only ever be 21 million Bitcoins in existence. However, each country has its own central bank, which can decide to add or remove money to or from the country’s supply depending on demand, economic conditions, and other factors. Central banks are likely to take a similar approach with CBDCs. With the power of central banks behind them, CBDCs could have immense reach. However, the ultimate role of CBDCs remains unclear, and whether and how they dampen current market fervor for decentralized cryptocurrencies remains to be seen. While innovation in fintech is exciting, and seems to promise greater access to financial transactions for historically underserved populations, there may still be a long way to go for us to envision a world with multiple CBDCs working seamlessly together. Important disclosures Share Topic Investing basics Tags Currency Related viewpoints May 21, 2021 Blockchain, Bitcoin, and fintech innovation John Hancock Investment Management We provide a brief history of fintech innovation and consider what blockchain technology and cryptocurrencies may have in store for investors. Read more June 28, 2019 Investing in fintech innovation Bruce L. Glazer, Portfolio Manager Wellington Management Learn about the disruption and innovation at the intersection of finance and technology—and why now is the right time for investing in fintech. Read more Explore the latest thinking from our network Sign up to get market insight and analysis delivered straight to your inbox. Subscribe now All Tags 529 plans (17) Absolute return (7) Active management (57) Asset allocation (71) Bull market (26) China (33) Commodities (11) Coronavirus (52) Currency (25) Dividends (24) ETFs (34) Elections (19) Emerging markets (37) Energy sector (15) Equities (170) Europe (26) Federal Reserve (71) Financials sector (28) Fixed income (88) Global economy (106) Growth stocks (21) Healthcare sector (12) High yield (10) Industrials sector (3) Inflation (36) Interest rates (78) International equities (33) Japan (1) Jobs market (12) Late-cycle investing (19) Liquidity (7) Long/short equity (17) Market volatility (116) Mid cap (9) Multifactor investing (35) Municipal bonds (9) Oil (7) Portfolio construction (57) QE (12) Risk management (47) Small cap (9) Sustainable investing (28) Tariffs and trade (28) Taxes (25) Technology sector (28) Utilities sector (6) Valuations (30) Value stocks (33) Yield (26) Careers Contact us Legal Privacy policy Accessibility Site map Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license. John Hancock Investment Management LLC is the investment advisor for the closed-end funds. A widespread health crisis, such as a global pandemic, could cause substantial market volatility, exchange-trading suspensions and closures, affect the ability to complete redemptions, and affect fund performance; for example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social, and economic risks. Any such impact could adversely affect the fund’s performance, resulting in losses to your investment. Mutual funds © 1999–2021 John Hancock Investment Management Distributors LLC and affiliated companies. All rights reserved. Member FINRA | SIPC, 200 Berkeley Street, Boston, MA 02116 Click here to view a prospectus or summary prospectus. You may also request one from your financial professional or by calling us at 800-225-5291. The prospectus includes investment objectives, risks, fees, expenses, and other information that you should consider carefully before investing. Some information may not be approved by certain organizations. Please check with your organization before using this information. ETFs John Hancock ETFs are distributed by Foreside Fund Services, LLC in the United States, and are subadvised by Dimensional Fund Advisors LP or our affiliate Manulife Investment Management (US) LLC. Foreside is not affiliated with John Hancock Investment Management Distributors LLC, Dimensional Fund Advisors LP or Manulife Investment Management (US) LLC. ETF shares are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns. Click here to view a prospectus or summary prospectus. You may also request one from your financial professional or by calling us at 800-225-5291. The prospectus includes investment objectives, risks, fees, expenses, and other information that you should consider carefully before investing. 529 If your state or your designated beneficiary’s state offers a 529 plan, you may want to consider what, if any, potential state income-tax or other state benefits it offers, such as financial aid, scholarship funds, and protection from creditors, before investing. State tax or other benefits should be one of many factors to be considered prior to making an investment decision. Please consult with your financial, tax, or other professional about how these state benefits, if any, may apply to your specific circumstances. You may also contact your state 529 plan or any other 529 education savings plan to learn more about their features. Please contact your financial professional or call 866-222-7498 to obtain a Plan Disclosure Document or prospectus for any of the underlying funds. The Plan Disclosure Document contains complete details on investment objectives, risks, fees, charges, and expenses, as well as more information about municipal fund securities and the underlying investment companies that should be considered before investing. Please read the Plan Disclosure Document carefully prior to investing. John Hancock Freedom 529 is an education savings plan offered by the Education Trust of Alaska, managed by T. Rowe Price, and distributed by John Hancock Distributors LLC through other broker-dealers that have a selling agreement with John Hancock Distributors LLC. John Hancock Distributors LLC is a member of FINRA and is listed with the Municipal Securities Rulemaking Board (MSRB). © 2021 John Hancock. All rights reserved. Information included in this material is believed to be accurate as of the printing date. John Hancock Freedom 529 P.O. Box 17603 ■ Baltimore, MD 21297-1603 ■ 866-222-7498 ■ jhinvestments.com/529 529 PLANS ARE NOT FDIC INSURED, MAY LOSE VALUE, AND ARE NOT BANK OR STATE GUARANTEED. " "