Central Bank Digital Currency development around the world

July 4, 2022

Central Bank Digital Currency development around the world

Interest in a Central Bank Digital Currency (CBDC) has skyrocketed in recent years, with 87 countries exploring issuing CBDCs as of March 2022 – a list that will surely grow over the next few years. For the uninitiated, CBDCs are a type of digital fiat currency issued by a country’s central bank. Essentially this digital currency would function as online cash, without the volatility of popular cryptocurrencies like Bitcoin.

For most countries, the only form of currency available with the backing of a central bank has traditionally been physical cash money. While alternative digital options are becoming more widely available, most involve a certain level of risk and unwanted complexity. Technical details aside, a CBDC is legal electronic cash that can be used just like ordinary money, with the backing of a central financial authority that can guard against the kind of wide fluctuations in value that plague decentralized cryptocurrencies due to widespread speculation and supply/demand issues.

The main advantages of a central bank digital currency are that it can ease cross-border transactions, consolidate online transactions into a single central ledger, and remove the risk of private bank/cryptocurrency collapse. Digital currencies not backed by governing institutions face persistent volatility and security hurdles that currently prevent them from replacing more traditional forms of payment, either online or offline. As CBDCs may affect how society makes transactions in the future, it is worth looking in detail at the countries that are making the most progress toward CBDC implementation.

CBDC development around the world

The United States – As the largest economy in the world, America’s potential embrace of a CBDC creates incentives for other countries to avoid being left behind. Despite a robust domestic digital payment system, the Federal Reserve has expressed interest in the development of a CBDC in recent years. In January 2022, the Fed released a report providing economic context weighing the benefits and risks of CBDCs, as part of the “first step” in issuing such a currency.

With the US dollar still secure as the financial unit of choice worldwide, the implementation of a dollar-backed CBDC would have significant implications. In recent months, another wave of high volatility and value swings across the decentralized cryptocurrency market have once again shown the utility of a more stable digital solution for online payments.

Despite these factors, policymakers remain divided on the CBDC issue, and the Federal Reserve Bank has indicated that it would not move forward without clear support from the White House and lawmakers. If such hesitancy continues for much longer, the United States risks lagging behind emergent economies that are moving forward at a faster rate to adopt CBDCs.

China – Of all the major economies, China has gotten the furthest in developing its CBDC. China has been exploring a potential digital currency since 2014 and the e-CNY system saw its first trials in the 2022 Winter Olympics. There are already ambitious plans for its expansion.

China is already far ahead of most countries in the digital economic sphere, with private payment systems such as AliPay and TenPay outcompeting Western rivals such as Visa. The ability of these Chinese firms to process transactions on large scales, coupled with the Chinese government’s strong internal ties to, and ability to regulate, private companies gives China a distinct advantage in the race to develop a functioning CBDC.

Russia – Russia first announced plans to issue its CBDC in 2017. By December 2021, the government said that a prototype for the digital ruble was complete, and had already successfully undergone a number of test transactions. Like China, Russia is openly hostile to decentralized cryptocurrencies, and has called for a total ban on them and other digital assets outside its control.

The recent invasion of Ukraine and the sanctions it has generated have only further incentivized Russia to develop an alternative currency insulated from Western market tools such as SWIFT and other payment systems, and Moscow sees CBDCs as a way to maintain economic independence in the future.

India – The Reserve Bank of India plans to introduce a digital rupee sometime in 2022 or 2023. Like China and Russia, India is looking to ensure financial stability by rejecting the decentralized ethos of cryptocurrencies like Bitcoin, while also avoiding the “dollarization” of local economies that receive foreign investment. 

India also sees CBDCs as a way to address rampant tax evasion and reduce the black/gray market economy. Regulating the financial system and reducing capital flight are among the key goals of India’s CBDC program.

Thailand – Thailand has also been moving quickly towards the development of a CBDC. Four proofs-of-concept for wholesale CBDCs were conducted in 2018, with Thailand following a two-pronged approach to their development. The country is investing in local retail CBDC development, as well as a mCBDC (multi-currency CBDC) in cooperation with several Asian and Middle Eastern economies.

While no country has managed to introduce a fully-functional CBDC as of mid-2022, Thailand’s impressive progress thus far makes it a global leader and trendsetter. The recent “PWC Global CBDC Index 2021” ranked Thailand #1 (tied with Hong Kong) for CBDC development and maturity.

Looking ahead

The difficulty of integrating CBDCs within the existing economic structure is considerable, but the positive trajectory is clear. Several countries around the world are making significant progress towards solving the outstanding technical issues, putting a stable, trustworthy, and secure digital currency firmly on the horizon. 

Questions remain about how different CBDC models will be integrated, or how such new payment systems will be regulated globally. But their eventual implementation is inevitable – making the CBDC landscape an essential area of focus for any company doing business internationally or offering digital payments or transactions.

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