Impact of CBDCs on Business and Reporting

Central Bank Digital Currencies (CBDCs) are a form of digital currency issued by a country’s central bank and have the potential to significantly impact business and reporting in various ways. The value of CBDCs is fixed by the central bank and equivalent to the country’s fiat currency. So, what are the potential benefits of CBDCs? They would provide both households and businesses with financial security, convenience, and accessibility. CBDCs can also help protect against illegal activities by providing a clear and traceable digital currency.

CBDCs have the potential to transform the way businesses operate and interact with their customers, suppliers, and partners. For governments around the world, they are an attractive option to create a seamless cross-border payment system. CBDCs can enable faster, cheaper, and more secure transactions across different countries and regions, which will reduce the costs and risks of doing business internationally. Cost savings from digitizing cash and reducing the reliance on intermediaries is another benefit. CBDCs can streamline the payment processes and reduce the operational expenses for businesses that deal with a significant volume of cash or complex payment system. CBDCs can also create new market opportunities for businesses. Financial services would be accessible to more people and businesses, especially in developing countries where traditional banking infrastructure is lacking or inefficient. They can provide a platform for new products and services that leverage the features of digital money.

CBDCs enable real time reporting of transactions and balances, which can improve the accuracy and timeliness of financial statements. This means that businesses can report their financial information to the relevant authorities and stakeholders as soon as it is generated, without any delays or errors. This enhances transparency, accountability, and compliance, as well as reduces costs and risks associated with the manual reporting processes.Another added benefit is instantaneous transaction settlement.This means that payments made with CBDCs are cleared and settled immediately, without intermediaries or intermediation fees which improves liquidity, efficiency, and security of the payment system.It can also affect the timing and recognition of revenues and expenses, as well as the measurement and valuation of assets and liabilities.

CBDCs also require integration with existing systems, such as accounting software, payment platforms and tax authorities. Depending on the objectives of the central bank, they can integrate with these systems in various ways. For example, CBDCs can be issued on a blockchain platform that is compatible with existing payment infrastructures. Alternatively, CBDCs can be issued on a separate platform that is compatible with other systems through APIs (Application Programming Interface) or bridges. CBDCs can also be integrated with existing systems at the user level through digital wallets or mobile applications. The benefits and challenges of each integration option depend on the trade-offs between efficiency, security, privacy, and inclusion.

Although CBDCs can help to facilitate the collection and verification of tax information, there may also be some tax implications to consider. Businesses must be aware of the potential benefits and risks of CBDCs and prepare for the changes they may bring to their reporting practices.One of the main tax implications of adopting CBDCs is the need to ensure that they are treated consistently with existing tax rules and principles. For example, CBDCs should be subject to the same income, consumption and transaction taxes as other forms of currency, and their use should not create new opportunities for tax evasion or avoidance. Additionally, CBDCs should be integrated into the existing reporting and information exchange systems for tax purposes, and their transactions would be traceable and verifiable by tax authorities. It is important to establish transparent governance procedures for the issuance and management of these CBDCs.

Several countries, such as the Bahamas, Jamaica, and Nigeria, have launched their own CBDCs. Meanwhile, over a hundred nations are researching and experimenting with CBDCs. Some of the leading central banks in this field are from Brazil, China, the euro zone, India, and the UK. CBDCs have the potential to significantly change the way businesses operate and report their financial activities, as they offer faster, cost efficient, and more transparent transactions. However, CBDCs also pose significant challenges and risks, such as regulatory uncertainty and disruption of existing payment systems. Therefore, businesses need to carefully assess the opportunities and threats of CBDCs, and prepare for the possible changes in their accounting, auditing, taxation, and compliance practices.

Authors: Joshua Pagano, CPA | [email protected] and Michael Sousa, CPA | [email protected]