CBDC activity heats up, but few projects move beyond pilot stage

Government-issued electronic currency seems to be an idea whose time has come.

“More than half of the world’s central banks are now developing or making concrete experiments on digital currencies,” the Bank for International Settlements, or BIS, reported in early May – something that would have been unthinkable just a few years ago. .

The BIS also found that nine out of ten central banks were exploring some form of central bank digital currencies, or CBDCs, according to its survey of 81 central banks conducted last autumn but just published.

Many were amazed by the progress. “It is really remarkable that almost 90% of central banks are operating on CBDCs,” said Ross Buckley, KPMG-KWM Professor of Disruptive Innovation at the University of New South Wales in Sydney. “The year-over-year growth in this sector is extraordinary.”

“What I found most surprising was the speed at which advanced economies were moving towards retail CBDCs,” Franklin Knoll, president of Knoll Historical Consulting, LLC, told Cointelegraph. “As recently as the middle of last year, central banks in advanced economies were considering CBDCs quite comfortably, not seeing them as particularly necessary or worthy of much attention.”

The pace picked up last year, the report observed. After the Bahamas launched the world’s first live retail CBDC – Sand Dollar – in 2020, Nigeria followed in 2021 with its own electronic money, eNaira. Meanwhile, Eastern Caribbean and China released pilot versions of their digital currencies, DCash and e-CNY, respectively. “More is likely to come: a record share of central banks surveyed – 90% – operating in some form of CBDC,” BIS said.

The Bahamas struggles, Sweden holds discussions, Chile delays

However, a successful CBDC can be said to be easy to implement. The International Monetary Fund said in March that the Bahamas’ new digital money has struggled to gain traction, with less than 0.1% of the currency in circulation in that island nation, and that “there are limited avenues for using the sand dollar.” ” The population needs more education, the IMF said, a challenge that other government-issued electronic currencies may also face.

Sweden’s central bank, the Riksbank, has been researching, discussing and experimenting with digital currencies for the longest time. Its e-krona project started in 2017 and a pilot program launched in 2020 is now in its second phase. Karl-Andreas Clausen, a senior advisor at Riksbank’s payments division, told Cointelegraph that there could be a number of reasons why central banks might implement a CBDC, but “at Riksbank, this is first and foremost a decline in Sweden’s use of cash.”

Sweden is on track to become the first cashless society in the Western world. According to the Riksbank, from 2010 to 2020, the proportion of Sweden using cash fell from 39% to 9%. But, this also raises questions. As Clausen told Cointelegraph:

“If physical cash disappears, the public will not have access to central bank money. This will be a serious change over the past 400 years in Sweden. With the e-krona, the Riksbank will offer central bank money that can be used The public can.”

Still nothing has been decided in Sweden. “It’s not clear that we will need this,” Clausen said. “So first, we have to figure out if we need it and if it’s doable. We’re not there yet.”

However, Clausen has little doubt that it could be successful if a modern government decides to issue a digital currency. However, it would need to be ensured that he actually needs a CBDC. “Neither the Riksbank, nor the major central banks around the world, have decided whether or not to issue CBDCs,” he declared. Not even China? “I haven’t heard that they have made a final decision on issuance,” he told Cointelegraph.

Elsewhere, Chile announced last week that it was delaying the rollout of its CBDC, explaining that the government-issued digital peso needs more study. According to one report, Chile wants to develop a national payment system that is “inclusive, flexible and protects people’s information”. But, its central bank said it still did not have enough information to make a final decision on it.

According to the CBDC tracker, only the Bahamas and Nigeria have moved forward to “launch” full CBDCs in the real world, while 2022 has seen more canceled projects like Singapore’s Project Orchid than the full roll-out so far . On the other hand, there were only five “pilot” programs running in January 2022 compared to 15 in May 2020, which suggests that more launches may be imminent.

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What is driving the trend?

The BIS sees a variety of driving factors behind this “increasing momentum” towards CBDCs. Advanced economies are interested in improving domestic payment efficiency and security while maintaining financial stability. By comparison, poorer economies, emerging market or developing economies, may focus more on financial inclusivity, or seek ways to enable those who have never had a bank account to participate in the economy.

Andrey Kosevsky, co-founder of Whispercash.com – whose firm has developed a digital carrier tool that can be used by CBDCs – agreed that developing countries typically “compensate for the lack of private sector fintech or payments companies”. and want to increase financial inclusion. For the uninitiated,” further telling Cointelegraph:

“I am not surprised that the number of central banks exploring digital currencies is now 90%, last year it was 80% and in 2018 it was almost 30%.”

“For advanced economies, the catalyst was stablecoins,” Knoll said, adding that 2021 was “the year of stablecoins.” He added that central banks in the developed world have begun to take seriously the possibility that stablecoins could move against fiat currencies, threatening their monopoly on money and potentially disrupting monetary policy.

As for BIS’s argument that the COVID-19 pandemic could be a prod, “I don’t see much evidence for a flight from the impact of COVID-19 and cash driving new interest in CBDCs,” Noll said. said. “Cash access remains strong and may rebound to pre-pandemic levels.”

Peer pressure can also be a factor – yes, even among central bankers. As Buckley told Cointelegraph:

“If one’s major competing countries do this, everyone feels the need to be left behind or at risk – some form of sophisticated FOMO.”

Kosevsky seems to agree: “Central banks in developed countries feel the need for digitization to remain relevant.”

Can state-run digital currencies co-opt crypto?

Where does cryptocurrency come into all this? To be clear, government digital currency is usually issued in a currency unit of land such as the peso in Chile, and the dollar in the United States, and is the “obligation” of the central bank. By comparison, cryptocurrencies have their own currency “unit” – such as ether (ETH) – and are private digital assets that have no claim on central banks.

According to the BIS survey, most central banks consider payment networks such as bitcoin and ethereum to be of little threat to their activities, and stablecoins even less: “Most central banks surveyed still consider the use of cryptocurrencies for payments to be trivial or limited to a niche.” agree. group.”

Still, can’t a CBDC pose a threat to the existence of cryptocurrencies at some point? “A year ago I thought they would – now I don’t,” Buckley told Cointelegraph. CBDCs are essentially payment instruments, whereas cryptocurrencies are more like speculative assets. “These new tools will not represent a potential threat to the existence of bitcoin and the like, but they will make it harder for bitcoin to argue for itself as anything other than a speculative play,” he said.

Gaurav Roy, a senior analyst at Boston Consulting Group in India who also contributes to the CBDC tracker, told Cointelegraph that many governments still view crypto as “a major threat to their country’s macroeconomics and the core financial/payment landscape”. As, and for this reason, these countries regularly issue warnings about cryptocurrencies, introduce laws to tax crypto transactions, and sometimes even ban crypto trading. Roy cited China as a case in point: it banned cryptocurrencies while simultaneously conducting “the world’s largest CBDC pilot trial with 261 million users.”

That said, Roy still sees stablecoin projects alive and continuing to play an important role in the decentralized finance ecosystem – even with widespread CBDC adoption. Kocevski, for his part, did not think that government-issued electronic money was a potential threat to crypto.

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Not only does Knoll believe that CBDCs and cryptocurrencies can coexist, but that CBDCs can potentially work to “popularize and mainstream crypto in general.” As the public and private sectors become more informed and comfortable with cryptocurrencies, “this should move the entire industry forward,” he told Cointelegraph, adding:

“The downside to cryptocurrencies is that CBDCs will work to exclude private cryptocurrencies, particularly stablecoins focused on the retail payment sectors. Cryptocurrencies will remain in the bottom of the payment system where they perform unique functions and provide specialized services. .

Overall, a lot has happened on the CBDC front in recent years. While most of the advanced projects to date have been in non-Western economies such as the Bahamas, Nigeria and China, there is increasing interest in many Western economies such as France and Canada, all the more notable as many already have advanced payment systems. As Knoll said:

“Just look at President Biden’s recent executive order about moving a US CBDC and a far cry from the 2020 and 2021 speeches by Fed officials that questioned the need for anything like that.”