Marcus Xavier DeFi

CBDC “Central Bank Digital Currency”

So where are digital currencies at?

What is a Central Bank Digital Currency (CBDC)?

A CBDC is virtual money backed and issued by a central bank. As cryptocurrencies and stablecoins gain momentum and acceptance, the world’s central banks realize that they need to provide an alternative—or let the future of money pass them by.

The Atlantic Council provide some great insights into what’s happening with CBDCs that I think you will find interesting.

130 countries, representing 98 percent of global GDP, are exploring a CBDC.  64 countries are in an advanced phase of exploration (development, pilot, or launch).

19 of the G20 countries are now in the advanced stage of CBDC development. Of those, 9 countries are already in pilot. Nearly every G20 country has made significant progress and invested new resources in these projects.

11 countries have fully launched a digital currency. China’s pilot, currently reaching 260 million people, is being tested in over 200 scenarios, including public transit, stimulus payments and e-commerce.

The European Central Bank is on track to begin its pilot for the digital euro. Over 20 other countries will take steps towards piloting their CBDCs in 2023. Australia, Thailand and Russia intend to continue pilot testing. India and Brazil plan to launch in 2024.

G7 banks, including the Bank of England and the Bank of Japan are developing CBDC prototypes and consulting the public and private sectors on privacy and financial stability issues.

Why create a CBDC?

The motivation of different countries for issuing CBDCs depends on their economic situation. Some common motivations are:

  • promoting financial inclusion by providing easy and safer access to money for unbanked and underbanked populations;
  • introducing competition and resilience in the domestic payments market, which might need incentives to provide cheaper and better access to money;
  • increasing efficiency in payments and lowering transaction costs;
  • creating programmable money and improving transparency in money flows; and
  • providing for the seamless and easy flow of monetary and fiscal policy.

It is the last point that I think makes it very difficult for states to ignore CBDC’s. Having an alternative digital economy in play that is not aligned to the monetary policy of the state is problematic to say the least. The implementation of CBDCs is of course not without challenges. CBDCs require a complex regulatory framework including privacy, consumer protection, and anti-money laundering standards which need to be made more robust before adopting this technology.

So, in my mind whilst this must happen, it will not happen overnight!