Central bank digital currencies will get some international limelight over the next couple of weeks as China plans to test its digital yuan at the Beijing Winter Olympics.
The e-CNY has been in a public pilot for nearly two years, available to residents in 10 cities including Shanghai, Shenzhen and Xi’an. Nearly $14bn of transactions have been made using the digital currency, according to a People’s Bank of China official.
The digital yuan is a retail CBDC meant for domestic use. It requires a Chinese bank account. However, international visitors will be allowed to use the currency during the two-and-a-half-week sporting event — though it is uncertain how many people will be allowed at this year’s games as China continues its strict zero Covid policy.
The test comes as central banks around the world are at various stages in their own CBDC projects.
Race to a digital dollar
The Federal Reserve is a few steps behind — it released its own discussion paper on CBDCs on 20 January after a delay of nearly six months. Conspicuous for its absence of any recommendation, it shifts the choice over whether or not to recommend a digital dollar to Congress and the White House.
Still, the matter is now closer to the “first step” of broad public consultation. The Fed will join the likes of the Bank of England, which in conjunction with the UK Treasury will start a public consultation this year. The European Central Bank is a little ahead of both; having completed a consultation, it is now in the early stages of a two-year investigation phase.
Central banks themselves are quite keen on the idea of a CBDC. According to Washington-based think tank, the Atlantic Council, 87 countries making up 90% of global GDP are exploring CBDCs. Of these, nine have launched a digital coin, while 14 are in a pilot phase.
The Bank of International Settlements — the ‘bank for central banks’ — said 13 out of its 17 Innovation Hub projects that are active or will be launched this year are related to CBDCs and improvements in the payments system. The bank’s London hub, which opened last year, will look at developing a platform to store, transfer and make payments using retail CBDCs for consumer and business use.
Many central banks are careful to stress that a final decision on creating a CBDC has yet to be made. The Fed has made clear it would require elected officials to give it explicit authority to issue a CBDC before going into the design phase.
However, considering how the Fed’s discussion paper explores the optimal ways of implementing a CBDC, it’s clear the central bank is laying the foundation for issuing one.
“[Central banks] are not all that neutral,” said Cédric Wahl, co-founder of Secretarium, a blockchain lab for banks and winner of a CBDC competition hosted by the Monetary Authority of Singapore.
He told Financial News that discussion papers like the Fed’s serve as recommendation roadmaps.
“They’re letting themselves be guided because they don’t have a mission statement. In essence, they need legislation to go forward.”
Some in the market feel it is all but decided at this point — a brief from Bank of America published shortly after the Fed’s discussion paper on 24 January said CBDCs were “an inevitable evolution of today’s electronic currencies.”
But even if a CBDC was approved, central banks for the large economies plan on taking it slow. The BoE has said not to expect a digital pound before 2025. The same Bank of America brief estimates a digital dollar will be rolled out between 2025 and 2030.
Notably, one recommendation that the Fed and central banks of other advanced economies have made is to have limited contact between the central bank and consumers. There would be ‘intermediation’, where private sector firms such as banks and non-bank entities would handle public interaction with CBDCs, similar to the model that exists now with paper money.
“They don’t want an operational footprint facing the public,” said Wahl
He believes a major factor in going down the safe route instead of taking more novel approaches is the risk to financial stability.
“Very much the fear, and it permeates throughout approximately a third of the document, is that they would kill fractional reserve banking.”
A report released earlier this month by the House of Lords on a digital pound has also raised the issue of ‘disintermediation’, where individuals and businesses would be more inclined to hold central bank money rather than commercial deposits.
“Higher levels of disintermediation would likely lead to more expensive credit and tighter lending criteria,” the report warned. “Without safeguards, CBDCs could exacerbate financial instability during periods of economic stress as people would likely seek to replace bank deposits with CBDC.”
China’s role in pushing CBDCs
The caution on pace is deliberate, but a full rollout of China’s CBDC could likely accelerate timetables.
“The People’s Republic of China is moving much faster than anybody else,” said Wahl. He noted that Beijing’s CBDC is one of the major factors pushing the US to create a digital dollar.
“They conspicuously do not quote the e-CNY and do not mention the fact that other countries may be moving quicker than the United States as one of the reasons why they’re looking into this now,” he said.
Out of the four countries with the largest central banks — the US, EU, Japan and the UK — the US is furthest behind in developing a CBDC. However, the Fed may not see this as a problem, as chair Jerome Powell has said on several occasions that since the dollar is the world’s primary reserve currency, it is better “to get it right than be first.”
There are currently nine launched CBDCs. Eight belong to small island nations in the Caribbean, with the ninth being the Nigerian e-Naira.