Central bank digital currencies aren’t just coming. They are, to varying degrees, already here.
For one thing, more than 60 countries — including almost all major economies — are actively researching, developing, or piloting CBDCs.
In a very short time, the conversation has shifted from the benefits that CBDCs can bring to the economic threats associated with falling behind in the race to issue one.
CBDCs are digital versions of national fiat currencies and would be legal tender on par with paper money. While the idea has been around for decades, the growth of cryptocurrencies has led them to be considered more seriously. Stablecoins and other digital assets have shown how payments can be made easier, cheaper, and quicker — with the prospect of privately issued currencies pushing out old-fashioned fiat now a real possibility.
Nowhere is this change in conversation more clear than in the United States. In late 2019, as European and Asian economies were warming to the idea, Federal Reserve Chairman Jerome Powell said he didn’t see any clear value in issuing a CBDC. By this February he had changed his tune, saying that deciding whether to issue a digital dollar would be a “high-priority project” in 2021.
The U.S. isn’t alone in worrying about that. In August, the European Central Bank’s 20th annual review of the international role of the euro warned that “attention should be paid to the risks to stability that might arise if a central bank does not offer a digital currency.”
The Bahamas Beats Them All
China may be years ahead of any major economy in creating and testing a CBDC, but it was the tiny Bahamas that stole a march, launching the world’s first national digital currency last October.
The Sand Dollar isn’t going to change the world’s economy, but it has made it easier and cheaper to make payments.
The Eastern Caribbean Currency Union followed suit in April, with four of its eight members — Antigua and Barbuda, Saint Kitts and Nevis, Saint Lucia, and Granada — launching DCash, a joint CBDC. The other four island nations are piloting it.
Pilot Programs Flying Ahead
In place since the spring of 2020, China’s digital yuan pilot has seen more than 70 million transactions worth $5 billion, according to the People’s Bank of China. Its ongoing digital yuan renminbi tests — lotteries giving shoppers millions of dollars worth of the digital currency in small sums — have been very successful.
China took another step forward in August when 35 small and medium-sized banks embedded digital wallets in their mobile apps, joining the big six state-owned banks that were involved in earlier programs. And nearly another 100 plan to access it through a Shanghai-based firm’s clearing platform. China is also working on a global clearing network aimed at making the yuan renminbi an international currency.
South Korea recently chose locally based Ground X, developer of the Klaytn blockchain, to build its CBDC pilot platform. It also enlisted Samsung to work on ensuring digital won payments can be made by mobile devices without internet access. Hong Kong’s goal for its CBDC pilot is to “future-proof” the financial center’s economic clout. Thailand’s CBDC project is moving ahead with plans for a limited pilot of retail payments by June 2022, with plans to roll out a digital baht in three to five years.
EU member Ukraine passed a law in July allowing its central bank to issue its own CBDC — which may clash with the ECB’s stated goal of having one digital euro. And in August, its Ministry of Digital Transformation said it was looking into a pilot program paying its staff in a CBDC. In non-EU Europe, Sweden is well along with its CBDC pilot, made easier by the fact that it is already a nearly cashless society, with cash accounting for less than 1% of GDP.
It’s not just individual countries that are experimenting with CBDCs. This month, the Financial Times noted that several groups of countries are experimenting with building a cross-border CBDC that allows instant payments using different digital currencies. The Bank for International Settlements is participating in a project with Australia, Malaysia, Singapore, and South Africa called “Project Dunbar.” Meanwhile, Hong Kong, China, the United Arab Emirates, and Thailand are about to begin working on the “mCBDC” project. Saudi Arabia and the UAE are also experimenting with cross-border CBDCs.
Actively Exploring CBDCs
France was among the first and most aggressive supporters of a digital euro, going so far as to launch its own CBDC tests with the goal of giving the EU’s CBDC project a head start when the rest of Europe caught up. So it’s perhaps fitting that the European Central Bank announced it formally began developing a digital euro, beginning with a two-year investigation phase, on July 14 — also known as Bastille Day, when the French Revolution kicked off an attack on Europe’s traditional political power structure.
Russia’s central bank governor called a CBDC “the future for our financial system,” while the country also sees a CBDC as a way to counter possible U.S. sanctions and undermine the dollar’s position as the world’s reserve currency. It launched a limited pilot program with a dozen banks — including four of its largest — in June.
Canada is developing a CBDC in part to counter the economic threat of cryptocurrencies and private stablecoins, which central bankers and economists say could take away tools governments use to stabilize their economies during financial downturns and instability.
Singapore has shortlisted 15 companies to build a retail CBDC. Nigeria is promising an eNaira launch on its October 1 Independence Day, while Ghana has selected a German technology partner to help create a pilot. South Africa is working with Accenture on a project exploring both a wholesale and retail CBDC, running through 2022. Jamaica minted its first batch of CBDCs in late August for an imminent pilot. Brazil, meanwhile, pushed back plans to roll out a CBDC from 2022 to 2024 or 2025, saying it needed more time to research the project.
Big Economies Considering Digital Currencies
For all the U.S.’s newfound interest in a digital dollar, Fed Chairman Powell recently reiterated his intention to make sure the U.S. gets a CBDC right rather than first. He recently promised a CBDC report this month, adding that staving off stablecoins was another reason to consider a digital dollar.
India, for its part, is very actively looking into beginning a digital rupee pilot — possibly before the end of the year, according to its central bank governor — while simultaneously threatening to outlaw Bitcoin and other cryptocurrencies altogether.
Elsewhere, a Japanese official recently said his country would have a “clearer view” of its plans for pursuing a CBDC in 2022. Australia’s Reserve Bank is exploring a CBDC, but so far hasn’t seen a use case that would justify it. Neighboring New Zealand recently announced plans to look into one.
Moving Ahead
Just the scope of the countries, planning, actively looking into, and seriously considering CBDCs makes clear that they are coming.
There are several main reasons for this, starting with central banks’ fear of losing control of their economies and their tools to affect it in times of crisis revealed by Facebook’s widely feared and reviled Diem stablecoin project. That project has said it hopes to launch a pilot this year but also suggested it would “fade out” if the U.S. launches a digital dollar.
Taking on the dollar, making it far cheaper and faster to move money internationally — especially remittances for the poor — and just keeping up with other nations are also heavily involved in the calculations.
Regardless, the regulatory and political picture of the future of CBDCs is moving fast and changing rapidly.
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