CBDC activity heats up, but few projects go beyond the experimental stage

CBDC activity heats up, but few projects go beyond the experimental stage – Mail Bonus

State-issued electronic money seems to be an idea that is time for.

“More than half of the world’s central banks are now developing or experimenting with digital currencies,” the Bank for International Settlements, or BIS, said in early May – something that would have been unthinkable just a few years ago.

The BIS also found that nine out of ten central banks were examining the central banks’ digital currencies, or CBDCs, in one form or another, according to their survey of 81 central banks conducted last autumn but recently published.

Many were amazed at the progress. “It is truly remarkable that about 90% of central banks are working on the CBDC,” Ross Buckley, a KPMG-KWM professor of disruptive innovation at the University of New South Wales, Sydney, told the Cointelegraph. “The growth between years in this field is incredible.

“What surprised me most was the speed with which sophisticated economies were moving toward retail CBDCs,” Franklin Noll, president of Noll Historical Consulting, LLC, told Cointelegraph. “So recently and in the middle of last year, central banks in developed economies took a rather relaxed view of the CBDC and did not consider it particularly necessary or worthy of much attention.

The momentum of speed last year, was stated in the report. After the Bahamas launched the world’s first live CBDC retailer – Sand Dollar – in 2020, Nigeria followed in 2021 with its own electronic currency, eNaira. At the same time, the Eastern Caribbean and China released pilot versions of their digital currencies, DCash and e-CNY, respectively. “And there is probably more to come: the central bank’s record in the survey – 90% – is involved in some kind of CBDC work,” said BIS.

Bahamas fighting, Swedes expect, Chile delays

However, implementing a successful CBDC may be easier said than done. The Bahamas’ new digital money has struggled to make ends meet, with less than 0.1% of the currency in circulation in the island nation, the International Monetary Fund said in March, and “there are limited ways to use the Sand Dollar. There is a need for more public education, the IMF said, a challenge that other government-issued e-currencies are likely to face as well.

The Central Bank of Sweden, the Riksbank, has been researching, discussing and experimenting with digital currencies for longer than most others. Its electronic project began in 2017 and the pilot program, which began in 2020, is now in its second phase. Carl-Andreas Claussen, a senior adviser in the Riksbank’s payment department, told the Cointelegraph that there were many reasons why central banks might want to implement the CBDC, but “at the Riksbank it is primarily a decline in Sweden’s use of cash. . ”

Sweden is in the race to become the first money-free society in the western world. From 2010 to 2020, the proportion of Swedes who used cash fell from 39% to 9%, according to the Riksbank. But this also raises questions. As Claussen told the Cointelegraph:

“If physical cash disappears, the public will no longer have access to central bank money. This will be a serious change from what has been the case in Sweden for the past 400 years. With an electronic króna, the Riksbank will offer central bank capital that the public can use. “

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

Claussen, however, doubts that if a modern government decides to issue a digital currency, it can succeed. However, it must be made sure that it really needs CBDC. “Neither the Riksbank nor the major central banks around the world have decided whether to issue the CBDC or not,” he said. Not even China? “I have not heard that they have made a final decision on publication,” he told the Cointelegraph.

Riksbankshuset, the headquarters of the Swedish Central Bank in Stockholm. Source: Arild Vågen

Elsewhere, Chile announced last week that it was delaying the installation of its CBDC, explaining that a digital peso issued by the government needed further investigation. Chile is seeking to develop a national payment system that is “inclusive, resilient and protects people’s information,” according to a report. But his central bank said he still did not have enough information to make a final decision.

According to the CBDC Tracker, only the Bahamas and Nigeria have achieved a full “start-up” of the CBDC in the real world, while by 2022, more projects such as Project Orchid from Singapore have so far been canceled but fully implemented. On the other hand, there were only five “experimental” plans in place in January 2020, compared to 15 in May 2022, indicating that more launches could be imminent.

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What drives the development?

The BIS sees various motivating factors behind this “growing momentum” towards the CBDC. Sophisticated economies tend to be interested in improving domestic payment efficiency and security, while maintaining financial stability. Poorer economies, emerging markets or developing economies, for comparison, could focus more on financial inclusion, or look for ways to enable people who have never had a bank account to participate in the economy.

Andrey Kocevski, co-founder of WhisperCash.com – whose company has developed a digital carrier that could be used by the CBDC – agreed that developing countries usually want to make up for the lack of fintech or private payment companies and increase financial adjustment for non-banks , “The Cointelegraph added:

“I am not surprised that the number of central banks that look at digital currencies is 90% now, compared to last year it was 80% and in 2018 it was about 30%.

“For a developed economy, the motivation was stablecoins,” said Noll, adding that 2021 was “the year of stablecoins”. Central banks in the developed world began to take seriously the possibility that stablecoins could make progress against fiat currencies, threaten their monopoly on money and potentially disrupt monetary policy, he said.

Regarding BIS’s assertion that the COVID-19 pandemic could have been motivating, “I do not see much evidence of the effects of COVID-19 and the flight from cash that fuels new interest in the CBDC,” Noll added. “Cash use is still high and could be recovering from pandemics.

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

“If one’s main competitor does this, everyone feels the need to follow through or risk being left behind – some kind of sophisticated FOMO.

Kocevski seemed to agree: “Central banks in developed countries see the need for digital to be relevant.

Could state-run digital currencies accept cryptocurrency?

Where do cryptocurrencies come from in all this? Just to be clear, the state’s digital money is usually issued in the country’s currency unit, such as pesos in Chile and dollars in the United States, and is the “debt” of the central bank. Cryptocurrencies, by comparison, have their own “unit” currency – such as Ether (ETH) – and are digital private assets with no central bank requirement.

According to the BIS survey, most central banks see that payment networks such as Bitcoin and Ethereum pose little threat to their operations and stablecoins even less: “Most central banks in the survey still consider the use of cryptocurrencies for payments to be trivial or limited. groups. “

However, could CBDCs not create an existential risk for cryptocurrencies at some point? “A year ago I thought they would do it – now I do not,” Buckley told the Cointelegraph. CBDCs are basically payment instruments, but cryptocurrencies are more like speculation. “These new tools will not pose an existential threat to Bitcoin and the like, but they will make it harder for Bitcoin to argue for itself as something other 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 the Cointelegraph that many governments still see cryptocurrencies as “a major threat to the country’s macroeconomics and major financial / payment landscape,” and reason. , these countries regularly issue cryptocurrencies warnings, implement laws to tax cryptocurrencies and sometimes even ban cryptocurrencies. Roy offered China as an example: It banned cryptocurrencies but at the same time “conducted the largest CBDC pilot test in the world with 261 million users.

That said, Roy still sees stablecoin projects survive and continue to play an important role in a decentralized financial ecosystem – even with the widespread adoption of the CBDC. Kocevski, for his part, did not think the government-issued electronic money was a threat to cryptocurrencies.

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Not only does Zero believe that CBDC and cryptocurrencies can coexist, but CBDCs could potentially “work to increase popularity and cryptocurrency in general. As the public and private sectors become more enlightened and happy with cryptocurrencies, “this should boost the whole industry,” he told the Cointelegraph, adding:

“The downside to cryptocurrencies is that the CBDC will work to eliminate private cryptocurrencies, especially stablecoins that focus on retail payment areas. Cryptocurrencies will be in the niches of the payment system as they serve unique features and provide specialized services.

Overall, a lot has happened on the CBDC front in recent years. Although most advanced projects to date have been in non-Western economies such as the Bahamas, Nigeria and China, interest in many Western economies such as France and Canada seems to be increasing, all the more notable because many are already advanced payment system in place. As Noll said:

“Just look at President Biden’s recent executive order, which is all about strengthening the US CBDC and is a long step from the 2020 and 2021 speeches of Fed officials who questioned the need for such a thing.