The rise in popularity of cryptocurrencies such as bitcoin, as well as the Covid-19 epidemic, have generated a debate among central banks over whether they should issue their own digital currencies. Central bank digital currencies, or CBDCs, proponents claim, can facilitate cross-border transactions, promote financial inclusion, and ensure payment system stability.
Interest in central bank digital currencies (CBDCs) has resurfaced as the use of physical cash declines, particularly following a year of lockdowns. Since 2014, more than 60 central banks have been studying CDBCs, with several of them already conducting trials.
The Bank of Japan has started a one-year trial of its digital yen, and the People’s Bank of China has trialled its digital yuan in cities including Shenzhen, Chengdu, and Suzhou as well as holding a “digital wallet lottery”. Visitors attending the 2022 Beijing Winter Olympics will be able to use the digital yuan.
CBDC development is slower in Europe. According to President Christine Lagarde, the European Central Bank has looked into the potential uses of an EU-wide CBDC, but it will take at least another four years to come to fruition if it ever does.
The Bank of England CBDC working team is evaluating the “benefits, risks, and practicalities” of producing a so-called “Bitcoin” in the United Kingdom. Identifying whether there is a use case for a CBDC is an important part of their work.
The aforementioned schemes lack one feature that the Bahamas’ CBDC, the Sand Dollar, had when it was first introduced: the ability to quickly restore banking services to the outer islands during Hurricane Dorian in 2019. The Bahamas’ Central Bank responded with a “storm-proof” mobile-phone-based digital currency, thereby making it the world’s first operational CDBC.
The Sand Dollar allowed Bahamians to send and receive money electronically without the requirement for a bank account. It provided a kind of money that could be used both on and off the islands, allowing for the transmission of tiny amounts over the phone, much like handing someone a five-dollar bill.
CBDCs are forming in emerging markets
Many CBDC projects are ongoing in emerging economies such as Cambodia, Ukraine, Uruguay, Ecuador, and Turkey, which is perhaps unsurprising. Facilitating financial inclusion is a fundamental component of their CBDC programs, which aims to close the gap between the banked and the unbanked.
Modernizing the banking system is an obvious benefit of CBDCs for industrialized countries, and the Bank of England has stated that keeping up with the digital economy is a primary motivator of its ambitions. However, there is still doubt over whether CBDCs would fill a larger demand in mature financial systems in Western democracies.
Western democracies are keeping up with the times in order to avert disruption
Indeed, governments’ interest in CBDCs originates from their desire to maintain control over monetary systems that they believe may be disrupted by digital assets. Stablecoins and DeFi protocols, in particular, are of great importance to central banks since they allow for speedy payments with little or no transaction costs, appealing peer-to-peer financing alternatives, and are essentially immune to the price fluctuation of other digital assets.
The interest in digital assets is continuously expanding as societies become increasingly cashless. States must compete or risk having their monetary policies eroded by private currencies, and CBDCs may be the answer to complement, rather than replace, real cash in the system.
The birth of CBDC around the world
Money as we know it is undergoing a transformation. Many stores no longer accept banknotes and coins; digital money now spans platforms, and new private currencies have developed.
While a myriad of alternative money forms is emerging into the currency arena, central banks throughout the world have not been sitting on their hands. Even when it comes to money production, they are increasingly committed to discovering and pursuing the opportunities that a digital, interconnected, and networked world provides.
We live in a cashless society
The Nordic countries are leading the way in terms of money transition, with a strong uptake of person-to-person mobile apps such as Danish MobilePay, Swedish Swish, and Norwegian Vipps, as well as in-store purchases via Apple Pay and numerous Android wallets hastening the change. With only 3% of retail payments made in cash, Norway leads the region, and indeed all of Europe.
The cash countdown
Cash will be obsolete by 2025-2027, according to a research paper commissioned by the Swedish Retail and Wholesale Council by Copenhagen Business School and Sweden’s KTH Royal Institute of Technology. The article even specifies a date when retailers will no longer be able to accept cash as a form of payment: March 24, 2023!
Getting to Cash 2.0
Why are central banks interested in digital currencies?
Central banks are typically tasked with ensuring financial stability, stable prices, and secure and efficient payments, i.e. supplying cash and regulating wholesale and retail digital payments.
With a greater reliance on the private sector for payments and money production, central banks are stepping up their efforts to develop an alternative to cash, possibly re-establishing their role in the money production and payments ecosystem by creating something other than money as a means of payment, such as a digital version of cash with value-added features or Cash 2.
With both institutional adoption and tremendous retail demand, the global consensus on digital currencies has crossed a vital turning point. Investment banks, payment businesses, asset managers, insurance companies, and university endowments are among the top global financial organizations mobilizing to adopt digital currencies and assets.
Financial centers all around the world are competing to be the first to establish future digital asset ecosystems. The international monetary system is fast changing into a more multipolar, decentralized ecosystem that is influenced less by geopolitical considerations and more by bilateral trade dynamics.
As several of the world’s most important economies and trade blocs embrace digital currencies at the same time, current dynamics are allowing the international monetary system to evolve smoothly. Every country will be able to have a place at the table and participate in a more robust global economy without friction or barriers to entry.