Digital Currencies: Transforming the Global Financial Landscape One Country at a Time

The introduction of a Central Bank Digital Currency (CBDC) could significantly impact financial intermediation and monetary policy implementation.

To assess the viability and usability of CBDCs, central banks worldwide are actively conducting pilot programmes and research projects.

The Basics of CBDCs

In its comprehensive research paper on CBDCs, the Bank for International Settlements (BIS) categorises different forms of money using a "money flower" Venn diagram.

Source: BIS' Research on CBDC

This diagram delineates the various types of CBDCs, highlighted in gray, while distinguishing Bitcoin and other cryptocurrencies as private digital tokens.

According to the BIS, the concept of CBDCs has existed for over two decades, predating Bitcoin.

However, it has gained significant prominence in recent years. This surge in interest is largely due to advancements in fintech, particularly developments in blockchain technology, which enable the creation of digital tokens representing a store of value.

Additionally, the shift toward CBDCs aligns with the broader trend of moving toward a more cashless society.

Countries Zooming in but US Falling Behind

With the global race for the future of money accelerating, 134 countries representing 98% of the global economy are now researching, piloting or deploying CBDCs.

Over half of these nations are in advanced stages of development, pilot programmes, or have already launched their CBDCs, according to a recent study by the United States (US)-based Atlantic Council.

Source: Atlantic Council's CBDC Tracker

In May 2020, only 35 countries were exploring CBDCs.

Today, that number has nearly doubled, with 68 countries in the advanced phases of development, pilot, or launch.

Among the Group of 20 (G20) nations, 19 are actively progressing in their CBDC initiatives, with 11 already in the pilot stage, including Brazil, Japan, India, Australia, South Korea, South Africa, Russia, and Turkey.

Three countries have fully launched a CBDC: the Bahamas, Jamaica, and Nigeria.

The Eastern Caribbean Currency Union, comprising eight countries, had to halt its DCash due to technical issues and is now developing a new pilot.

Currently, 36 pilot projects are underway, including China's e-CNY, which is being trailed with 260 million people across 25 cities, and the ECB's digital euro, now six months into its "preparation" phase.

China’s digital yuan remains the most extensive and advanced pilot, tested in various scenarios from public transport tickets and COVID checks to purchasing oil and precious metals.

The European Central Bank (ECB) is in the preparation phase, conducting practical tests with some transactions settled in a controlled environment.

This two-year preparation stage will conclude in 2025.

Although an example of a CBDC that failed to gain traction is the United Kingdom's Britcoin, which was active from 2011 to 2019.

Additionally, Brazil, Russia, India, China, and South Africa—the founding members of BRICS—are in the pilot phase of their own CBDC explorations.

Several new BRICS members, including Saudi Arabia, Iran, and the UAE, are also exploring cross-border wholesale CBDCs.

Since last year, BRICS has been actively promoting the development of an alternative payments system to the dollar.

The figure below shows the exponential growth in CBDC exploration.

Source:The World Economic Forum's "Central Bank Digital Currency Global Interoperability Principles" White Paper (June 2023)

Research by the US-based Atlantic Council think tank reveals that all G20 countries, except Argentina, are now in advanced phases of CBDC development.

Notably, the US is increasingly falling behind.

While progress is being made on a banks-only "wholesale" digital dollar, a CBDC for the wider US population appears "stalled," according to the report.

Federal Reserve chief Jerome Powell expressed that "nothing like that is remotely close to happening".

Josh Lipsky of the Atlantic Council emphasized the growing divergence among the world's largest central banks regarding CBDCs, highlighting how much further ahead China, Europe, and Japan are.

Lipsky warned that the US lagging behind could lead to "a more fractured international payments system," potentially diminishing Washington's influence in global finance if other countries set new CBDC standards.

The figure below shows the map of CBDC's status as of May 2024.

Source: CBDC Tracker

No Universal Case for CBDCs as Each Economy is Different

Although certain objectives remain universally significant, some regions may identify unique priorities in the design of their CBDCs.

Kristalina Georgieva from International Monetary Fund (IMF) said:

"There is no universal case for CBDCs because each economy is different. In some cases, a CBDC may be an important path to financial inclusion—for instance, where geography is an obstacle to physical banking. In others, a CBDC could provide an essential backup in the event that other payment instruments fail. One such case was when the Eastern Caribbean Central Bank extended its CBDC pilot to areas struck by a volcanic eruption last year. So, central banks should tailor plans to their specific circumstances and needs.”

Below is an overview of domestic and cross-border interoperability CBDC projects.

Source: Atlantic Council's CBDC Tracker

CBDCs' Challenges

Many countries are actively researching or developing CBDCs, with three having already implemented them.

The primary aim of a CBDC is to offer businesses and consumers enhanced privacy, transferability, convenience, accessibility, and financial security.

For the unbanked population worldwide, a CBDC could provide a crucial means to receive payments, store funds, and settle bills.

Additionally, CBDCs have the potential to streamline financial system maintenance, lower cross-border transaction costs, and offer more affordable money-transfer alternatives.

However, as countries delve into the development and benefits of CBDCs, several challenges emerge.

A significant concern is the risk of a bank run if citizens rapidly transfer funds from commercial banks to purchase CBDCs, potentially destabilising the financial market, especially in volatile economic conditions.

Another challenge lies in establishing a secure and resilient infrastructure for CBDC operations, which must withstand cyberattacks, internet connectivity issues, and ensure compatibility with existing payment systems.

Ensuring privacy and security is paramount for gaining public trust and safeguarding citizens' rights.

The introduction of new payment systems could profoundly impact daily life and might also pose risks to national security.

For instance, CBDCs could enable countries to create financial networks independent of the US dollar, potentially facilitating sanctions evasion.

Therefore, cross-border collaboration on CBDC governance, privacy, and security is essential.

Both private and public entities have begun setting standards and ensuring interoperability, but further efforts are needed to prevent the issuance of CBDCs from undermining national security objectives.

Daniel Field, Director of Innovation and Global Head of Blockchain at UST shed some positive light:

“We've already moved from proof of concepts and experimentation piecemeal on different aspects into proof of values and designing prototypes of full systems. In other words, many central banks are now working on the real thing. In parallel, we see more political and legislative work being done, setting the groundwork for future implementations. The sector is poised to continue this trajectory for some time but there are still many who are hesitant on the value equation – not on the theoretical benefits, but rather more the detailed risk-reward and cost-benefit in practice.”