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 digital currencies or running concrete experiments on them,” reported the Bank for International Settlements, or BIS, in early May — something that would have been unthinkable only a few years ago.

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

Many were taken aback by the progress. “It is truly remarkable that some 90% of central banks are doing work on CBDCs,” Ross Buckley, KPMG-KWM professor of disruptive innovation at the University of New South Wales, Sydney, told Cointelegraph. “The year-on-year growth in this field is extraordinary.”

“What I found most surprising was the speed at which advanced economies were moving toward retail CBDCs,” Franklin Noll, president at Noll Historical Consulting, LLC, told Cointelegraph. “As recently as the middle of last year, central banks in advanced economies were taking a rather relaxed view of CBDCs, not seeing them as particularly necessary or worthy of much attention.”

Momentum accelerated last year, the report observed. After the Bahamas launched the world’s first live retail CBDC — the Sand Dollar — in 2020, Nigeria followed in 2021 with its own electronic money, the eNaira. Meanwhile, the Eastern Caribbean and China released pilot versions of their digital currencies, DCash and e-CNY, respectively. “And there is likely more to come: a record share of central banks in the survey — 90% — is engaged in some form of CBDC work,” said the BIS.

The Bahamas struggles, Sweden deliberates, Chile delays

Implementing a successful CBDC may be easier said than done, however. The Bahamas’ new digital money has struggled to gain traction, accounting for less than 0.1% of currency in circulation in that island nation, the International Monetary Fund said in March, and “there are limited avenues to use the Sand Dollar.” More education of the populace is needed, said the IMF, a challenge that other government-issued electronic currencies will probably face as well. 

Sweden’s central bank, the Riksbank, has been researching, discussing and experimenting with digital currencies longer than most. Its e-krona project began in 2017, and a pilot program, launched in 2020, is now in its second phase. Carl-Andreas Claussen, a senior advisor in the Riksbank’s payments department, told Cointelegraph that there are lots of reasons why central banks might want to implement a CBDC, but “at the Riksbank, it is first of all the decline in Sweden’s use of cash.”

Sweden is racing toward becoming the Western world’s first cashless society. From 2010 to 2020, the proportion of Swedes using cash fell from 39% to 9%, according to the Riksbank. But, this also raises questions. As Claussen told Cointelegraph:

“If physical cash disappears, the public will not have access to central bank money anymore. That will be a serious change from how it has been over the last 400 years in Sweden. With an e-krona, the Riksbank will offer central bank money that the public can use.”

Still, nothing has been decided in Sweden. “It is not clear that we will need it,” Claussen said. “So first, we have to sort out if we need it at all and if it is worthwhile to do it. We are not there yet.” 

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

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

According to CBDC Tracker, only the Bahamas and Nigeria have progressed to full CBDC “launch” in the real world, while 2022 thus far has seen more canceled projects like Singapore’s Project Orchid than full roll-outs. On the other hand, only five “pilot” programs were underway in January 2020, compared with 15 in May 2022, which suggests more launches could be imminent.

Related: Blockchains are forever: DLT makes diamond industry more transparent

What is driving the trend?

The BIS sees different motivating factors behind this “growing momentum” toward CBDCs. Advanced economies tend to be interested in improving domestic payment efficiencies and safety, while maintaining financial stability. Poorer economies, emerging markets or developing economies, by comparison, may focus more on financial inclusivity, or look for ways to enable people who have never had a bank account to participate in the economy.

Andrey Kocevski, co-founder at WhisperCash.com — whose firm has developed a digital bearer instrument that could be used by CBDCs — agreed that developing countries usually “want to compensate for the lack of private sector fintech or payment companies and to increase financial inclusion for the unbanked,” further telling Cointelegraph:

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

“For advanced economies, the catalyst was stablecoins,” said Noll, adding that 2021 was “the year of the stablecoin.” Central banks in the developed world began taking seriously the possibility that stablecoins could make headway against fiat currencies, threatening their monopoly on money and disrupting monetary policy potentially, he said.

As for BIS’ contention that the COVID-19 pandemic may have been a prod, “I do not see much evidence for the impact of COVID-19 and a flight from cash driving new interest in CBDCs,” added Noll. “Cash usage remains strong and may be rebounding to pre-pandemic levels.”

Peer pressure, too, could be a factor — yes, even among central bankers. As Buckley told Cointelegraph:

“If one’s major competitor countries do this, everyone feels the need to follow or risk being left behind — some form of sophisticated FOMO.”

Kocevski seemed to agree: “Central banks in developed countries feel the need to digitize in order to stay relevant.”

Could state-run digital currencies co-opt crypto?

Where do cryptocurrencies figure in all this? Just to be clear, government digital money is typically issued in the currency unit of the land such as pesos in Chile, and dollars in the United States, and is a “liability” of the central bank. Cryptocurrencies, by comparison, have their own currency “unit” — like Ether (ETH) — and are private digital assets with no claim on the central bank. 

According to the BIS survey, most central banks see payment networks like Bitcoin and Ethereum posing little threat to their activities, and stablecoins even less: “Most central banks in the survey still perceive the use of cryptocurrencies for payments to be trivial or limited to niche groups.”

Still, couldn’t CBDCs pose an existential danger to cryptocurrencies at some point? “A year ago I thought they would — now I don’t,” Buckley told Cointelegraph. CBDCs are essentially payment instruments, while cryptocurrencies are more like speculative assets. “These new instruments will not represent an existential threat to 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.

Gourav Roy, a senior analyst at the Boston Consulting Group in India, who also contributes to CBDC Tracker, told Cointelegraph that many governments still view crypto as a “big threat to their country’s macroeconomics and main financial/payment landscape,” and for that reason, these countries regularly issue warnings about cryptocurrencies, introduce legislation to tax crypto transactions, and sometimes even ban crypto trading. Roy offered China as a case in point: It banned cryptocurrencies while at the same time “carrying out the world’s biggest CBDC pilot testing with 261 million users.”

That said, Roy still sees stablecoin projects surviving and continuing to play an important part in the decentralized finance ecosystem — even with widespread CBDC adoption. Kocevski, for his part, didn’t think government-issued electronic money was an existential threat to crypto.

Related: DeFi attacks are on the rise — Will the industry be able to stem the tide?

Noll not only believes that CBDCs and cryptocurrencies can co-exist, but CBDCs could potentially “work to popularize and mainstream crypto in general.” As public and private sectors become more informed and comfortable with cryptocurrencies, “this should advance the entire industry,” he told Cointelegraph, adding:

“The downside for crypto is that CBDCs will work to crowd out private cryptocurrencies, especially stablecoins focused on retail payment areas. Cryptocurrencies will stay in niches in the payment system where they serve unique functions and provide specialized services.” 

Overall, much has happened on the CBDC front in recent years. While most advanced projects so far have been in non-Western economies like the Bahamas, Nigeria and China, interest in many Western economies like France and Canada seems to be picking up, all the more noteworthy because many already have advanced payment systems in place. As Noll said: 

“Just look at President Biden’s recent executive order, which is all about advancing a U.S. CBDC and is a far step from 2020 and 2021 speeches by Fed officials that questioned the need for any such thing.”