The Central Bank Digital Currency (CBDC) race heated up this year with the need for digital payments and cashless payment systems exacerbated by the coronavirus pandemic and economic disruption. As 2020 comes to a close, we take a look back at the most important developments in CBDC.
Why Develop a CBDC?
Despite being influenced by decentralized cryptocurrencies like Bitcoin, CBDC is more of a reaction to than an embrace of cryptocurrency, which central banks see more as a threat to be managed.
With the immense popularity of Bitcoin and the announcement of the launch of Facebook’s Libra last year, governments have realized the importance of protecting against these threats to the existing banking and traditional finance industry.
One of the major recent motivations for the creation of CBDC was, as mentioned, the planned development of the Facebook-backed currency and blockchain, Libra, which would essentially position Facebook, a private company with 2 billion users, to wield enough power to challenge the central bank.
Governments around the world have long been wary of cryptocurrencies since Bitcoin’s inception due to its ability to circumvent capital controls, and the possibility of its being used for illicit purposes like money laundering. Central banks are also worried that cryptocurrencies could undermine the authority and control of central banks, as there is currently no government-controlled reserve of currencies like Bitcoin, and they would have difficulty regulating such anonymous and decentralized systems.
To maintain control over the production and supply of money, and to prepare in advance for the seemingly inevitable cashless society, countries are now launching experiments to test the workings of CBDC.
Below is an overview of some of the most significant CBDC developments of 2020.
CBDC With Most Impact: China, USA and Europe
Let’s start with the big players. While the race for a functioning CBDC is taking place across more that 80% of the world’s central banks—it goes without saying the coming Digital Dollar, Digital Yuan and Digital Euro will have the most global impact.
As 2020 wraps up, China remains at the forefront of the race and is expected to become the first major economy to launch a CBDC. Its sovereign digital currency program, dubbed Digital Currency Electronic Payment (DCEP), has launched one of the largest real-world trials in several cities over the last few months. By May 2020, China had already filed more than 120 patent applications for its official digital currency (alternately referred to as digital yuan in this article), more than any other country.
In April 2020, the People’s Bank of China ran digital currency/electronic payment (DC/EP) trials for over 6700 use cases, processing over 1 billion RMB across different provinces in the country.
In the past, the Chinese yuan has struggled to gain traction on an international level, as the government has kept restrictions on the currency, including the prevention of large amounts of capital leaving the country. Morgan Stanley analysts are now predicting that the Chinese yuan will become the third-largest reserve currency in the world, with increased foreign investment.
The DCEP is highly advanced in its design and functionalities, and ties together much larger Chinese goals around the data economy and international finance and with the ongoing Belt and Road expansion of China, there will be huge opportunities to utilize the DCEP and create international adoption.
The US dollar is the world’s reserve currency. Controlling the de-facto global currency affords the United States a range of privileges, which includes driving demand for the dollar which sustains the borrowing power of the US and allows them to impose devastating sanctions on other nations. Despite being the nation with the most to lose in the CBDC race, the development of the digital dollar has been painfully slow.
According to Jerome Powell, the Federal Reserve Chair, the United States will not be cutting any corners with its potential central bank digital currency or digital dollar, choosing not to aim to do it first but do it right.
Since August 2020, the US Federal Reserve has been conducting research and experimentation related to distributed ledger technologies and the potential use cases for digital currencies to understand their potential opportunity and risk. While they have been criticized for moving slowly and allowing China to race ahead—the objective of the central bank remains to assess the safety and efficiency of digital currency systems before racing to roll one out.
3. European Union
In an interview in early October 2020, European Central Bank (ECB) Christine Lagarde discussed how the coronavirus pandemic drastically changed the economic landscape worldwide. She broached the topic of a digital euro and announced the central bank’s intentions for it. European Central Bank has been driving forward in their quest for a CBDC, beginning its experiments by recently launching a public consultation system to get a public opinion of the proposed digital euro.
In October 2020, the European Central Bank launched a public consultation and has started experiments to decide whether to create a digital euro for the 19-nation currency club. A digital Euro would be an electronic form of central bank money that is equivalent to euro banknotes and accessible to all citizens and firms.
CBDC For the Rest Of The World
Covering the rest of the world, there have been other significant developments in the CBDC space. Below is a brief list summary of the six other CBDC developments of note.
1. United Kingdom
The Bank of England launched a public consultation and discussion paper on a CBDC for the UK in March 2020. Nearly a year later and the BoE has still not yet made a decision on whether to introduce CBDC and intends to engage widely with stakeholders on the benefits, risks and practicalities with regard to the same. A BoE CBDC would be an innovation in both the form of money provided to the public, and the infrastructure on which payments can be made.
In February 2020, the Bank of Canada completed phase 4 of Project Jasper. In this phase, along with Payments Canada, The Bank has partnered with the Monetary Authority of Singapore and the Bank of England to work on a cross-border, cross-currency settlement system. This collaboration combines Project Jasper and Singapore’s Project Ubin to use DLT to make cross-border payments faster and less expensive. The Bank has pursued a contingent strategy to launch CBDC in order to create a state of sufficient policy and operational readiness.
In November 2020, the Reserve Bank of Australia announced a partnership with leading Australian banks and enterprise-Ethereum blockchain firm ConsenSys, to explore the implications of wholesale CBDC and distributed ledger technology (DLT).
The POC is trialing a CBDC that can be used by wholesale market participants for the funding, settlement and repayment of a tokenized syndicated loan on an Ethereum-based DLT platform. The PoC will be used to explore the implications of ‘atomic’ delivery-versus-payment settlement on a DLT platform as well as other potential programmability and automation features of tokenized CBDC and financial assets.
The Bank of Japan released its approach paper on CBDCs in October 2020. The BoJ is approaching development with a unique focus is on PoCs for offline CBDC payments, which will be resilient against natural calamities.
The BOJ states its objectives as being to ensure that the CBDC has universal access, security, resilience, instant payment capability and interoperability. In its CBDC design, the BoJ aims to avoid excluding some individuals, devices or cards used for transfers and payments, and to provide interoperability and portability of the digital yen.
5. Hong Kong
In early December 2020, Hong Kong Monetary Authority and the Digital Currency Institute of People’s Bank of China launched a technical pilot testing of the use of Digital Yuan for making cross-border payments, and are making the corresponding technical preparations for the same. The status of e-CNY is the same as cash in circulation, it will bring even greater convenience to Hong Kong and Mainland tourists.
Monetary Authority of Singapore completed Phase 5 of CBDC Project Ubin in July 2020. Phase 5 validated the use of smart contracts on the payments network prototype in cases such as Delivery-versus-Payment (DvP) settlement. Phase 5 sets out to understand the potential efficiency gains for the greater economy through better connectivity and integration.
Bahamas Surprises Everyone With Full-Scale CBDC Roll-Out
With all eyes on China and the United States, the Bahamas surprised the world in October 2020 when the Central Bank of the Bahamas announced the world’s first CBDC—the Sand Dollar—was now available to all citizens of the Bahamas.
The Bahamas is home to nearly 400,000 residents spread across 700 coral islands and the development of the Sand Dollar was viewed as a necessity for financial inclusion across the sparsely populated archipelago.
The world’s first CBDC became available to the residents of the Bahamas at around 10:00 pm UTC, according to an Oct.20 post on Facebook from Project Sand Dollar.
Residents of The Bahamas can trade the CBDC with any merchant on the archipelago leveraging a Central Bank approved e-Wallet on their mobile device with negligible transaction fees, according to the Sand Dollar website. The central bank selected transaction provider NZIA as its technology solutions provider for the rollout of the digital currency. Sand Dollar transfers are made using smartphones, as most of the population, roughly 90%, of the Bahamas citizens have been using mobile phones since 2017.
With 2020 wrapping up, there is no doubt central bank digital currencies will continue to be one of the hottest and most important developments in the digital space.
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