Consider: Is state-issued digital money an inevitability? An Atlantic Council report finds 114 countries representing over 95% of global GDP are now exploring central bank digital currencies (CBDCs). China’s digital yuan, the e-CNY, already reaches 260 million people. Eighteen G20 countries are in advanced stages of CBDC development.
“Nearly every G20 country has made significant progress and invested new resources in these projects over the past six months,” Atlantic Council researchers noted in December. Emerging market economies are active as well. Nigeria and the Bahamas were the first nations to fully launch CBDCs, and others in the Global South are expected to follow soon.
For the uninitiated: A CBDC is government-issued digital currency—denominated in the national/regional unit of account, whether dollars, euros, yen or something else. It can be a retail CBDC that would be used as a medium of exchange for the general public, or it can be a wholesale CBDC for financial institutions to use for interbank transfers or cross-border payments.
Questions swirl around state-issued digital currencies, whatever the currency’s design. Will it be secure, with privacy provisions; or will it be hackable? Or a means for governments to spy on their citizens? Can it open new possibilities for people who never had a bank account? Could it undermine struggling commercial banks? Will one CBDC have the capacity to transact with another CBDC? And so on.
Central banks are increasingly on board, and many have CBDC projects moving to advanced stages, says Jonas Gross, chairman of the Digital Euro Association (DEA), a think tank specializing in digital money, but “the clear majority is still conducting research,” he notes, “and has not yet decided if CBDCs will be issued.”
Although no country in Asia has formally launched a CBDC at scale, the International Monetary Fund (IMF) notes in a September 2022 report that “the Asia-Pacific region is at the forefront of CBDC exploration.” China leads, followed closely by India and Thailand. In August, Australia announced a limited-scale pilot using an Ethereum-based blockchain platform. Proof-of-concept efforts and experimentation have also been seen in Korea, Japan, Malaysia and Singapore.
Europe, too, is working on a digital euro, although “not at the same speed as Singapore or India,” says Kaj Burchardi, managing director at BCG Platinion, a Boston Consulting Group unit focusing on technology implementation. Western payment systems are primarily sound, so the urgency to roll out digital cash isn’t as pressing. Nevertheless, one could see a digital euro with limited features by 2026, predicts Gross.
The US lags. The New York Federal Reserve Bank’s recent Project Cedar, which has been looking at cross-border wholesale payments via a CBDC, was hailed by the Atlantic Concil for pushing US development forward. But Project Cedar is a wholesale CBDC design, according to Thomas Cowan, who worked on the MIT/Boston Federal Reserve study of CBDCs known as Project Hamilton.Wholesale CBDCs are usually less “impactful” than retail designs, which require “additional process, policy input and time,” says Cowan, now at Paxos.
Only four CBDCs are in circulation so far, all retail designs and mostly in small economies like the Bahamas—although Nigeria is one exception. Why are others so keen to follow?
For China, it’s regaining “control,” says Burchardi. As Alipay and Weixin Pay grew to dominate the nation’s nonbank mobile-based payments sector, China’s financial overseers became uneasy. The e-CNY will change that, allowing authorities to peer into transactions; many expect it to be used for surveillance.
In larger economies, some hail CBDCs as a promising monetary instrument, enabling governments to “helicopter” money to the public in crisis, as many did in a nonautomated fashion during the Covid-19 pandemic. The government could instantaneously transfer electronic dollars to digital wallets, cost free. It could even limit uses, to, say, paying for heat but not alcohol, explains Burchardi. Civil libertarians and others object to governments having so much information and control.
Meanwhile, there is also competition from the private sector, including stablecoins. “The emergence of private crypto assets has created an impetus to consider CBDCs,” the IMF further notes in its report.
Emerging markets and developing economies (EMDEs) like China, Mexico and Nigeria “tend to be more enthusiastic about retail CBDCs and have clearer motivations for their issuance, relative to central banks in advanced economies such as Canada, Japan and Singapore,” writes Kansas City Fed economist Ying Lei Toh in a research report. Engagement is high where financial inclusion is a national priority. “In Mexico and Nigeria, the share of unbanked individuals in the adult population is about 60%,” adds Toh.
As a result, some EMDEs are even looking at offline digital currency solutions—such as a physical CBDC debit card. But this can introduce other problems. For example, what happens to a country’s commercial and savings banks if a central bank distributes debit cards to individuals? Deposits could fall, and there might be less money to lend out to the nation’s citizens and businesses, says Burchardi; capping amounts held in digital wallets might help.
Recently, central banks have begun partnering with each other to develop digital currencies that can “talk” with one another, enabling cross-border payments. In September, for example, the Bank of Israel and the central banks of Norway and Sweden, together with the Bank for International Settlements, announced Project Icebreaker, designed to test interoperability between different retail CBDCs.
Many central banks are still treading carefully. The Central Bank of Taiwan has completed two CBDC research phases, investigating both wholesale and retail designs. Because introduction of a CBDC involves not just the digitization of cash, “but also reform of the payment system,” the bank tells Global Finance, it is moving cautiously. If it does move to full issuance, it will follow three key principles: “do no harm,” “coexistence,” i.e., with existing payment instruments; and “innovation and efficiency.”
As a potentially powerful new financial tool, CBDCs play a role in US-China rivalry. A March 2022 Hoover Institution study warns that “the spread of the e-CNY might diminish the role of the dollar as the world’s reserve currency and undermine the ability of the United States to deploy financial sanctions against rogue international actors.”
“I think there is a real risk for the US here,” adds Paxos’ Cowan, noting that trust is what makes the greenback the top reserve currency. “Today’s financial world trusts US government financial obligations and the US rule of law.” Less transparent policies and regulation, such as in China, inspire less confidence.
Could blockchain help a CBDC bridge the trust gap? Australia uses a private, permissioned blockchain for its CBDC pilot project. In contrast, the Project Aber pilot of Saudi Arabia and the United Arab Emirates uses a permissioned platform that might be described as “blockchain-inspired.” The New York Fed’s Project Cedar is also exploring “the potential of blockchain to improve the speed, cost, and access” of a wholesale CBDC.
Public blockchain platforms will be used only for small-scale projects, predicts Burchardi. Instead, distributed ledger technology (DLT), which can mix decentralized and centralized elements, may be better. Some DLT platforms can handle as many as 100,000 transactions per second—fast enough for a large-scale retail CBDC.
Challenges remain. The adoption rate of the Bahamas’ historic Sand Dollar is only 7.9% after two years, according to the Atlantic Council. Nigeria’s eNaira had almost a million customers one year after its launch—a smattering of its 221 million population. “The lack of adoption is a current failure point for many of the launched CBDCs,” says Gina Pieters, assistant instructional professor at the University of Chicago’s economics department.
The real challenge of CBDCs may be developing a clear sense of purpose. “What kind of role is the CBDC expected to play in the global economy and financial systems?” asks Dimitrios Salampasis, a lecturer at Australia’s Swinburne University of Technology. According to the DEA’s Gross, central banks still need “to find a clear value proposition that makes the use of CBDCs attractive.” The technology “can change a lot and almost nothing at the same time,” says Cowan. While CBDCs can make fiat currency faster, simpler and safer, “the role of government currency remains the same: as a unit of account, store of value and medium of exchange.”