Cash is No Longer King
Since ancient times when the Lydians made the first coins to pay their armies, money has continuously changed. From coins to paper money, credit cards, and now smartphone payments, our way of using money has evolved with technology. Cash is no longer king. Nowadays, most money exists digitally. People, businesses, and banks prefer digital payments because they are easier, more flexible, and more convenient.
The Rise of Central Bank Digital Currencies (CBDCs)
To keep up with these changes, many countries are looking into central bank digital currencies (CBDCs). These are digital versions of national currency. Microsoft is playing a significant role by providing technology to support this new currency through its global technology partner network. It's part of the Microsoft Cloud for Financial Services, which aims to help banks and businesses enhance their value and customer relations.
How CBDCs Are Special Among Digital Currencies
With the popularity of digital money, there has been a surge in innovation among governments, banks, and the global financial system. While cryptocurrencies such as Bitcoin have shown the value of digital currencies, they are not regulated and can be unstable.
However, CBDCs are different. They are digital assets supported by a country’s central bank, making them more reliable. A CBDC is a digital form of a country’s currency, with the same value, stability, and liquidity as cash. They work well with existing financial systems and are closely monitored by the central bank.
Some key benefits of CBDCs include:
- Lower Transaction Costs: Cross-border payments are cheaper and more transparent.
- Smart Contracts: Automated agreements that ensure accuracy and efficiency.
- Liquidity and Settlement Finality: Instant and irreversible transactions.
- Direct Government Payments: Such as tax refunds or stimulus funds deposited directly into digital wallets.
- Innovative Payment Methods: Allow for efficient transactions that traditional systems can’t match.
- Financial Inclusion: Easier access to financial services for people without bank accounts, especially in developing countries.
The potential of CBDCs is immense. It’s estimated that by 2030, the annual value of transactions involving CBDCs could reach USD 213 billion, showing a growth of over 260,000% in just seven years.
The Drex Project in Brazil
One of the early adopters of CBDC is Brazil. Microsoft is collaborating with Brazil's Central Bank (BCB) and commercial banks to develop a CBDC named Drex. This project aims to modernize Brazil’s economy by providing smarter financial services at lower costs.
Drex uses tokenization, which creates digital versions of financial assets, allowing new trading and transaction options. These tokens operate on a safe, decentralized ledger called Distributed Ledger Technology (DLT).
Drex could also integrate with Brazil’s fast payment system PIX and the global payments network SWIFT. In the future, it could even align with the Finternet framework and Unified Ledger proposed by the Bank for International Settlements (BIS), aiming to transform the global financial system.
Empowering Economies with CBDCs Worldwide
The Drex project embarked on its second development phase in June 2024, continuing for another 14 months with more privacy tests and use case explorations. Privacy and security are crucial, so Microsoft and its partners are dedicated to ensuring robust safeguards.
Microsoft is also part of early CBDC initiatives in several other countries. For instance, they are members of the Ensemble Project initiated by the Hong Kong Monetary Authority (HKMA), which focuses on creating standards for the interoperability of wholesale CBDCs, tokenized money, and assets.
Microsoft brings several strengths to these projects:
- Infrastructure Support: The Microsoft Azure platform offers a strong infrastructure, AI services, and top-notch security.
- Privacy and Security: Azure provides numerous security features, including the Zero-Knowledge Proof (ZKP) solution to protect digital assets.
- AI Innovation: Generative AI copilots can help in creating smart contracts, analyzing documents, and detecting risks.
- Global Reach: Azure has a vast network of datacenters, ensuring CBDC solutions are close to users, reducing delays, and ensuring high availability.
- Partner Ecosystem: Microsoft has a wide network of partners who offer expertise, best practices, and pre-built solutions like a CBDC sandbox.
Explore the Possibilities of CBDC with Microsoft
Microsoft is eager to share its knowledge and skills on CBDCs with countries and banks worldwide. For more information about Microsoft’s work on the Drex project and its role in FEBRABAN TECH 2024 in São Paulo, Brazil, check out Microsoft’s press release.
