With a changing financial world ahead of us, which banks are leading the charge in a world where CBDCs are a common occurrence? If the private sector uses cryptocurrency as a financial instrument, central banks will not be far behind.
Who plans the financial future? And who is late? Find out below.
What is a central bank digital currency?
A central bank digital currency
(CBDC) is a digital form of a central bank’s currency.
Similar to cryptocurrency, however, the digital token that makes up a CBDC is pegged exactly to the currency issued by a central bank. For example, a dollar-based CBDC would be a purely digital representation of the US dollar. It would have exactly the same value as a physical dollar and would remain tradable in all the same places as a physical dollar.
Another key distinction that distinguishes CBDCs from cryptocurrency is that they are owned by central banks, as the name suggests. Cryptocurrency until recently has been almost exclusively a private sector affair. CBDCs are state entities.
Overview of CBDCs in the world
According to the Atlantic Council, 100 countries around the world are all in the development phase of a CBDC. Of these 100, 11 countries have launched a CBDC program that is active right now. 17 in pilot phase, 33 in development phase and 39 still in the research phase. To get a measure of this, the Atlantic Council has a handy map on their website, linked above, to browse the various countries at all stages of development. A preview of the map can be seen below.
As we can see, CBDCs have become a rather popular financial instrument. However, very few countries have an active CBDC system. These are Nigeria, the Bahamas, Jamaica and the members of the Eastern Caribbean Monetary Union. Nigeria is forward-thinking in this regard, having launched the eNaira portfolio in January 2021. It remains to be seen whether or not these programs can be considered a success, given that they have only recently taken off. As of 2023, Jamaica is the newest country to launch a CBDC.
With 100 countries in one stage of development or another, it’s important to recognize that some are more enthusiastic about CBDCs than others. In 2023, China plans to expand the reach of their pilot program that has been tested by 260 million people in 2022 to the majority of its population.
Australia, Brazil, Russia, South Korea and Thailand plan to take important steps in their pilot programs in 2023. If you’re passionate about the prospect of CBDCs, those will be the countries to keep an eye on. All G7 countries will once again enter the pilot phase.
The main players
Some noteworthy projects to keep an eye on are the European Central Bank (ECB), Russia’s pilot program, and Japanese developments of their CBDC. The ECB is planning a two-tier system for their CBDC. What this two-tier system entails is not entirely clear, however, the ECB’s focus in its white paper is placed on the general use of the currency. That is, for the purpose of everyday purchases.
The ECB has also recommended that the digital euro generate interest. This means that attractive interest rates should be offered for small amounts, suitable for making purchases or payments, with lower interest rates applied to large amounts. The intent is not to make the digital Euro a store of value.
Experimental as always, the Bank of Japan (BOJ) differs from the motivations of other countries. Cash is still very king in Japan. In addition, memories of the 2011 earthquake and tsunami remain fresh and have therefore prioritized focusing on the Japanese currency while remaining functional in the event of a loss of power. CBDC resilience is a priority for the BOJ, something that is missing in a number of CBDC projects in the West.
Finally, the Russian central bank aggressively developed its CBDC in the wake of the sanctions raised against them due to the war in Ukraine. The goal of their CBDC development is de-dollarization and encouraging other nations to follow suit. If you find alternatives to the dollar interesting, Russia could be a CBDC to keep an eye on. Russia plans to beta test the digital ruble in 2023, with a full launch expected by 2024.
The usual suspects
While it might seem like the U.S. lags behind others pushing for a CBDC, it has plenty of reasons not to rush headlong into technology. As the largest reserve currency and facing threats of inflation and recession, it makes sense for the US to slow down its balance sheet a bit.
The U.S. Federal Reserve
The Federal Reserve has expressed concern that they may lag behind others in meta-finance, particularly the EU. As a result, the Federal Reserve launched Project Hamilton and Project Cedar.
Cedar was executed in November 2022 as evidence of a CBDC. Hamilton has a wider scope and in the first phase alone found that, at a minimum, a digital dollar would be able to process 99% of transactions in less than five seconds and settle between 17,000 and 1.7 million transactions per second. However, being the competitive place of the United States, there are also other private entities competing with independent projects to win the favor of the Federal Reserve as the lead developer for a digital dollar.
Bank of England
Late is the Bank of England (BoE). In a study conducted by the House of Lords, the committee found that there was no reason for the BoE to issue a CBDC. However, the Bureau of the Exchequer published a technical paper describing the reasons why the UK would benefit from a digital currency and since then, the BoE has been looking for aspiring digital wallet developers.