Since the launch of Bitcoin in 2009 and the subsequent proliferation of cryptocurrencies, many central banks have been exploring the feasibility and potential benefits of CBDCs. While some countries, such as Venezuela and Iran, have already introduced their own digital currencies, most CBDC initiatives are still in the research and development phase. Nonetheless, the competition among countries to be the first or the best to launch CBDCs is intensifying, fueled by various economic, technological, and geopolitical drivers.
So, who’s winning the global race for CBDCs, and why?
China: The frontrunner
China is widely considered the top contender in the CBDC race, primarily because of its large and rapidly growing digital economy, its advanced blockchain and digital payment infrastructure, and its central government’s strong support for technological innovation and financial inclusion. In 2014, the People’s Bank of China (PBOC) set up a digital currency research institute, and since then, it has been conducting extensive pilots and tests of its CBDC, known as Digital Currency Electronic Payment (DCEP), in various cities and sectors.
The DCEP is designed to be a two-tier system, with the PBOC as the sole issuer and intermediary bank, while commercial banks and payment providers serve as the front-end distributors and service providers. The DCEP would not only provide a more efficient and secure payment system but also enhance financial transparency and control, combat money laundering and tax evasion, and reduce reliance on the US dollar in international trade.
China has also been promoting the internationalization of the DCEP, by partnering with other central banks and organizations, such as the central banks of Thailand and the UAE, and by including it in the Belt and Road Initiative. Moreover, China’s CBDC ambition is seen as part of its broader strategy to challenge the dominance of the US dollar in the global currency system and to increase its geopolitical clout.
Other frontrunners
While China may be leading the pack, it is not the only country that is making significant progress in CBDC development and implementation. Some other notable frontrunners include:
Sweden: The Riksbank has been exploring the possibility of issuing an e-krona since 2017, to address the decline in cash usage and the need for a secure and accessible payment system in the face of potential cyber attacks or system failures. The e-krona is still in the testing phase, with a pilot planned for 2021.
The Bahamas: The Central Bank of The Bahamas launched the Sand Dollar, the world’s first retail CBDC, in October 2020, as a response to the severe damage caused by Hurricane Dorian and the need for efficient and inclusive digital payments in remote and vulnerable areas. The Sand Dollar is accessible through mobile apps and other digital channels and is intended to reduce the reliance on cash and traditional banking.
Switzerland: The Swiss National Bank has partnered with the Bank for International Settlements (BIS) and other central banks to develop a proof-of-concept for CBDCs, called Project Helvetia. The project aims to explore the potential benefits and risks of retail and wholesale CBDCs, such as enhancing payment efficiency, reducing counterparty risk, and improving cross-border transactions.
Benefits and challenges of CBDCs
CBDCs offer several potential benefits for both individuals and the economy, such as:
– Faster and cheaper payments: CBDCs could enable real-time and low-cost payments, especially cross-border, without the need for intermediaries or settlement periods.
– Financial inclusion: CBDCs could provide a secure and accessible payment system for the unbanked and underbanked population, who are often excluded from traditional banking services.
– Increased transparency and accountability: CBDCs could improve the traceability of financial transactions and reduce the risk of fraudulent activities or corruption.
– Monetary policy effectiveness: CBDCs could give central banks more control over the money supply and interest rates, allowing for more targeted and flexible monetary policies.
However, CBDCs also present significant challenges and risks that need to be addressed, such as:
– Cybersecurity and privacy: CBDCs could be vulnerable to cyber attacks, data breaches, and privacy violations, which could undermine the trust and adoption of the digital currency.
– Financial stability: CBDCs could disrupt or replace the existing financial infrastructure and intermediaries, such as commercial banks and payment processors, which could have implications for financial stability and systemic risk.
– Implementation and adoption: CBDCs require significant investment and coordination among various stakeholders, including governments, central banks, financial institutions, and technology providers. Moreover, the adoption of CBDCs could face resistance or skepticism from the public or private sector, especially in countries where cash is still widely used or where confidence in the monetary system is low.
In conclusion, the global race for CBDCs is driven by various economic, technological, and geopolitical factors, and is likely to intensify in the coming years. While some countries, such as China, are leading the pack in terms of CBDC development and implementation, others, such as Sweden, the Bahamas, and Switzerland, are also making significant progress. CBDCs offer potential benefits for individuals and the economy but also pose significant challenges and risks that need to be carefully addressed. As such, the pursuit of CBDCs requires a comprehensive and collaborative approach, that balances innovation, security, and inclusiveness.