The way people pay for things is changing as the nature of money itself transforms.
Fearing they may one day be left behind as digital, crypto and other currencies not backed by national governments continue encroaching on the use of physical, native fiat, the central banks of over 100 countries around the world have been undertaking a variety of investigative programs meant to research the technical feasibility of launching their own sovereign, virtual currencies backed by a federal banking system.
Industry observers see some of the most critical financial innovations of 2023 as being centered on the development of central bank digital currencies (CBDCs), as well as future-fit experiments with distributed ledger technology (DLT) sandbox initiatives and decentralized finance (DeFi) platforms.
The Asia-Pacific region is leading the charge. While no Asian government has formally launched a CBDC, the world’s two most populous nations, China and India, are both well underway in their experiments, although to admittedly mixed results from their citizens and businesses.
Other nations, including Singapore, Australia, Japan, Korea, and Hong Kong, are already piloting CBDCs, or plan to in 2023.
All G7 economies have successfully moved from the research stage of a CBDC to the development stage.
Fresh off Tuesday’s (Feb. 7) news of the Bank of England’s CBDC initiative, here is what the rest of world is up to, and why it’s becoming more important for central banks to keep pace with the rise of digital and instant payment options.
Retail CBDCs vs Wholesale CBDCs
There are multiple varieties of CBDCs that can be issued by a central bank.
The majority of nations looking into their own sovereign CBDC are considering either a retail CBDC, which can be used by the public for payments, similar to cash; a wholesale CBDC, which can be used by member banks and other financial institutions to transact with each other and move money in real-time; or a hybrid version of the two.
Governments including China, Australia, South Africa, India and Thailand are piloting or have piloted a hybrid CBDC that combines both retail and wholesale capabilities; while the U.S., Canada, Japan and Indonesia are in various stages of researching and developing one.
For its part, the U.K. is focusing on whether or not to launch a retail CBDC by 2030, if only because most of the benefits of a wholesale CBDC are already provided by the Bank of England’s (BoE) Real-Time Gross Settlement (RTGS) omnibus account, which facilitates wholesale payments settlement in central bank money.
Per an earlier PYMNTS report, the RTGS technical architecture includes the ability for a CBDC to be layered into its system if the BoE so chooses.
In contrast to the U.K., various member states in the EU are looking into both wholesale and retail CBDCs.
The European Central Bank (ECB), as a central issuer, is being tasked with creating the so-called digital euro CBDC, while eurozone countries are themselves contributing individually to developments for its use across both retail and wholesale applications.
In November of last year, the banks of France, Singapore and Switzerland together launched Project Mariana, a collaboration trialing their experimental CBDCs and DeFi protocols.
The ECB’s two-year investigation phase into the digital euro CBDC is expected to conclude in October and will result in a decision around the potential development of a digital euro prototype.
Financial messaging system SWIFT has successfully shown that CBDCs and tokenized assets can move seamlessly on its existing financial infrastructure, proving interoperability in cross-border transactions using CBDCs.
A separate cross-border CBDC payment infrastructure also launched this year (Jan. 19) in Davos during the World Economic Forum. Called the Universal Digital Payments Network (UDPN), it is meant to provide global interoperability between regulated stablecoins and CBDCs.