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

The government-issued electronic currency seems like an idea whose time has come.

“More than half of the world’s central banks are now developing or conducting concrete experiments on digital currencies,” the Bank for International Settlements, or BIS, said in early May.

The BIS also found that nine out of ten central banks are researching central bank digital currencies or CBDCs in one form or another, according to a survey of 81 central banks conducted last fall but just published.

Many were surprised by the progress. “It’s really remarkable that about 90% of central banks are working 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 area is phenomenal.”

“What I found most surprising was the rate at which advanced economies are moving towards retail CBDCs,” Franklin Noll, president of Noll Historical Consulting, LLC, told Cointelegraph. “In the middle of last year, central banks in advanced economies had a pretty relaxed view, not seeing CBDCs as particularly necessary or worthy of much attention.”

The momentum accelerated last year, according to the report. After the Bahamas launched the world’s first live retail CBDC (Sand Dollar) in 2020, Nigeria followed in 2021 with its own electronic currency, eNaira. Meanwhile, the Eastern Caribbean and China have released pilot versions of their digital currencies DCash and e-CNY. “There’s probably more: A record share of central banks in the survey — 90 percent — are doing some kind of CBDC work,” the BIS said.

Bahamas struggling, Sweden arguing, Chile postponing

However, implementing a successful CBDC may be easier said than done. The Bahamas’ new digital currency is struggling to gain traction, making up less than 0.1% of the currency in circulation in this island nation, the International Monetary Fund said in March, adding that “there are limited ways to use the Sand Dollar.” The IMF said the public needed more education and that other government-issued electronic currencies are likely to face a challenge as well.

Sweden’s central bank, the Riksbank, has been researching, discussing and experimenting with digital currencies longer than most. The e-krona project started in 2017 and a pilot program launched in 2020 is now in its second phase. Carl-Andreas Claussen, senior adviser in Riksbank’s payments division, told Cointelegraph that there are many reasons central banks might want to implement a CBDC, but “At Riksbank, above all, there is a decline in Sweden’s use of cash. ”

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

“If physical cash disappears, the public will no longer have access to central bank money. This will be a more drastic change in Sweden than it has been in the last 400 years. With an e-krona, the Riksbank will offer central bank money available to the public.”

Still, nothing is decided in Sweden. “It’s unclear whether we’ll need it,” Claussen said. “First, we need to determine if we need it and whether it’s worth it. We’re not there yet.”

However, Claussen has little doubt that if a modern government decides to issue a digital currency, it will be successful. However, he will need to make sure that he really needs a CBDC. “Neither the Riksbank nor the larger central banks around the world have decided whether to issue a CBDC,” he said. Not even China? “I have not heard that they have made a final decision to publish it,” he told Cointelegraph.

Riksbankshuset is the headquarters of the Swedish National Bank in Stockholm. Source: Arild Vagen

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

According to CBDC Tracker, while in the real world only the Bahamas and Nigeria are progressing to full CBDC “launch,” 2022 has so far seen more canceled projects than full rollouts like Singapore’s Orchid Project. On the other hand, only five “pilot” programs were running in January 2022 compared to 15 in May 2020, suggesting that more launches could be imminent.

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What is driving the trend?

The BIS sees different motivating factors behind this “growing momentum” towards CBDCs. Developed economies tend to be interested in improving local payment efficiencies and security while maintaining financial stability. By comparison, poorer economies, emerging markets or emerging economies may focus more on financial inclusion or seek ways to get people with no bank accounts to participate in the economy.

Andrey Kocevski, co-founder of WhisperCash.com, whose firm has developed a digital carrier tool that can be used by CBDCs, acknowledged that developing countries often “want to make up for the lack of private sector fintech or payments companies and increase financial inclusion for those without a bank account.” He told Cointelegraph:

“Considering it was around 80% last year and 30% in 2018, I am not surprised that the number of central banks discovering digital currencies is currently at 90%.”

“The catalyst for advanced economies was stablecoins,” Noll said, adding that 2021 is the “year of stablecoins.” Central banks in the developed world are beginning to take seriously the possibility of stablecoins making progress against fiat currencies, threatening their monopoly on money and potentially distorting monetary policy, he said.

As for the BIS’ assertion that the COVID-19 pandemic could be a prod, Noll added, “I don’t see much evidence of the impact of COVID-19 and the runaway from cash increasing new interest in CBDCs.” “Cash use remains strong and may return to pre-pandemic levels.”

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

“If one’s leading rival countries do this, everyone feels the need to follow through or risk being left behind – a kind of sophisticated FOMO.”

Kocevski seems to agree: “Central banks in developed countries feel the need to digitize to stay current.”

Can government-run digital currencies jointly use crypto?

Where are the cryptocurrencies in all this? To be clear, government digital money is typically issued in the country’s currency, such as the peso in Chile and the dollar in the US, and is an “obligation” of the central bank. Cryptocurrencies, by comparison, have their own currency “units” like Ether (ETH) and are private digital assets with no central bank claims.

According to the BIS survey, most central banks feel that payment networks like Bitcoin and Ethereum pose little threat to their operations, and stablecoins pose even less of a threat: groups.”

Still, wouldn’t CBDCs pose an existential threat to cryptocurrencies at some point? “I thought they were going to do it a year ago, now I don’t,” Buckley told Cointelegraph. CBDCs are essentially payment instruments, while cryptocurrencies are more like speculative assets. “These new tools will not pose an existential threat to Bitcoin and the like, but will make it harder for Bitcoin to defend itself as anything more than a speculative game,” he said.

Gourav Roy, a senior analyst at Boston Consulting Group in India who also contributes to the CBDC Tracker, told Cointelegraph that many governments still see crypto as “a major threat to their country’s macroeconomics and main financial/payments environment” Countries regularly issue warnings about cryptocurrencies, introduce legislation to tax crypto transactions, and sometimes even ban crypto trading. Roy cited China as an example: while banning cryptocurrencies, while simultaneously “conducting the world’s largest CBDC pilot test with 261 million users”.

However, Roy sees that, despite widespread CBDC adoption, stablecoin projects still continue to play an important role in the decentralized finance ecosystem. Kocevski did not consider government-issued electronic money an existential threat to crypto.

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Noll believes not only 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 knowledgeable and comfortable with cryptocurrencies, “this should advance the entire industry,” he said.

“The downside for crypto is that CBDCs will work to exclude private cryptocurrencies, particularly stablecoins focused on retail payment spaces. Cryptocurrencies will remain in niches in the payment system, where they serve unique functions and provide specialized services.”

Overall, a lot has happened on the CBDC front in recent years. While many of the most advanced projects so far are in non-Western economies such as the Bahamas, Nigeria and China, interest in many Western economies such as France and Canada seems to be growing, as many already have advanced payment systems. As Noll said:

“Look at the latest executive order from President Biden, which is far from the 2020 and 2021 speeches that were all about advancing the US CBDC and Fed officials questioned the need for such a thing.”