More governments and central banks are exploring creating their own Central Bank Digital Currencies or CBDCs. There are many reasons to explore digital currencies, and different countries' motivations for issuing CBDCs depend on their economic situation and use cases. Incentives for launching CBDCs include:
- Promoting financial inclusion by providing safer access to money;
- Introducing competition and resilience in the domestic payments market;
- Increasing efficiency in payments and lowering transaction costs;
- Creating programmable money and improving transparency in money flows; and
- In theory, providing for the seamless and easy flow of monetary and fiscal policy transmission.
As with anything, there can be positive and negative connotations for allowing digital control of money to rest with government central banks, especially in less democratic countries.
According to the Atlantic Council CBDC tracker, 114 countries, representing over 95 per cent of global GDP, are exploring a CBDC; 60 countries are currently at an advanced phase of exploration (development, pilot, or launch) of their own CBDC. Eleven countries have fully launched a digital currency, and China’s digital yuan (e-CNY) pilot is set to expand to most of the country in 2023.
Financial sanctions on Russia have led countries to consider payment systems that avoid the dollar and how they can move their currency reserves away from the traditional dollar-denominated financial system. There are currently nine cross-border wholesale CBDC tests and seven cross-border retail projects currently underway worldwide, most involving two or more Central Banks and the Bank of International Settlement (BIS).
In 2023, over 20 countries will take significant steps towards piloting a CBDC. Australia, Thailand, Brazil, India, South Korea and Russia intend to launch pilot testing in 2023, and the ECB and BoE have tenders out for PoC projects. Eighteen of the G20 countries are now in the advanced stage of CBDC development. Seven of those countries are already in the pilot phase of their projects. Nearly every G20 country has invested new resources in these projects over the past six months.
CBDCs have issues from cybersecurity to sanctions and money laundering that need solving. Much work is needed to address how new standards can be created to ensure stable and transparent cross-border payments. Joe Biden’s executive order to explore American leadership in CBDC possibilities has led to The New York Federal Reserve’s wholesale CBDC experiment, Project Cedar, which has shifted the US from research to developing a digital dollar.
Digitally holding and transferring money is familiar for consumers and businesses, who have relied on bank accounts, online transactions, and payment apps for years. Over the last decade, many have ventured into holding digital currencies like bitcoin and ether. However, the forms of money used in those digital transactions are generally the liabilities of commercial banks and other private entities or cryptocurrencies. A CBDC-issued digital dollar would instead be a liability of the Federal Reserve, just as paper currency is.
CBDC benefits include hyper-rapid settlement speed and a far greater transaction volume processing than most options available today, including settlements across Bitcoin and Ethereum blockchain networks. The Boston Fed’s research established a technical baseline for CBDC transactions between 170,000 and 1.7 million transactions per second. The project completed nearly all transactions in under five seconds. This highly efficient real-time settlement speed could revolutionise money and payments.
Testing settlement speeds conceptually is great, but these projects are only experimenting with ‘digital money’ that has not yet become a store of value; it is just a medium of exchange. To become ‘money’, there needs to be ‘value’ in CBDCs otherwise, they are an academic experiment in name only. CBDCs will move from concept to reality in 2023, and it will be interesting to see how these develop in retail and wholesale markets.