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A CBDC is virtual money backed and issued by a central bank. As cryptocurrencies and stablecoins have become more popular, the world’s central banks have realized that they need to provide an alternative—or let the future of money pass them by.
Key findings
130 countries, representing 98 percent of global GDP, are exploring a CBDC. In May 2020, only 35 countries were considering a CBDC. A new high of 64 countries are in an advanced phase of exploration (development, pilot, or launch).
19 of the G20 countries are now in the advanced stage of CBDC development. Of those, 9 countries are already in pilot. Nearly every G20 country has made significant progress and invested new resources in these projects over the past six months.
11 countries have fully launched a digital currency. China’s pilot, which currently reaches 260 million people, is being tested in over 200 scenarios, some of which include public transit, stimulus payments and e-commerce.
The European Central Bank is on track to begin its pilot for the digital euro. Over 20 other countries will take steps towards piloting their CBDCs in 2023. Australia, Thailand and Russia intend to continue pilot testing. India and Brazil plan to launch in 2024.
In the US, progress on retail CBDC has stalled. However, other G7 banks, including the Bank of England and the Bank of Japan are developing CBDC prototypes and consulting the public and private sectors on privacy and financial stability issues.
The US is, however, moving forward on a wholesale (bank-to-bank) CBDC. Since Russia’s invasion of Ukraine and the G7 sanctions response, wholesale CBDC developments have doubled. There are currently 12 cross-border wholesale CBDC projects.
What is a CBDC?
A Central Bank Digital Currency (CBDC) is the digital form of a country’s fiat currency that is also a claim on the central bank. Instead of printing money, the central bank issues electronic coins or accounts backed by the full faith and credit of the government.
But don’t digital currencies already exist?
There are already thousands of digital currencies, commonly called cryptocurrencies. Bitcoin is the most well-known fully decentralized cryptocurrency. Another type of cryptocurrency are stablecoins, whose value is pegged to an asset or a fiat currency like the dollar. Cryptocurrencies run on distributed-ledger technology, meaning that multiple devices all over the world, not one central hub, are constantly verifying the accuracy of the transaction. But this is different from a central bank issuing a digital currency.
So why would a government get into digital currencies?
There are many reasons to explore digital currencies, and the motivation of different countries for issuing CBDCs depends on their economic situation. Some common motivations are: promoting financial inclusion by providing easy and safer access to money for unbanked and underbanked populations; introducing competition and resilience in the domestic payments market, which might need incentives to provide cheaper and better access to money; increasing efficiency in payments and lowering transaction costs; creating programmable money and improving transparency in money flows; and providing for the seamless and easy flow of monetary and fiscal policy.
What are the challenges?
There are several challenges, and each one needs careful consideration before a country launches a CBDC. Citizens could pull too much money out of banks at once by purchasing CBDCs, triggering a run on banks—affecting their ability to lend and sending a shock to interest rates. This is especially a problem for countries with unstable financial systems. CBDCs also carry operational risks, since they are vulnerable to cyber attacks and need to be made resilient against them. Finally, CBDCs require a complex regulatory framework including privacy, consumer protection, and anti-money laundering standards which need to be made more robust before adopting this technology.
What are the national security implications of a CBDC?
New payments systems create externalities that impact the daily lives of citizens, and can possibly jeopardize the national security objectives of the country. They can, for example, limit the United States’ ability to track cross-border flows and enforce sanctions. In the long term, the absence of US leadership and standards setting can have geopolitical consequences, especially if China and other countries maintain their first-mover advantage in the development of CBDCs. Our work on digital currencies at the GeoEconomics Center is at this nexus of the future of money and national security.
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Study shows 130 countries exploring central bank digital currencies
A total of 130 countries representing 98% of the global economy are now exploring digital versions of their currencies, with almost half in advanced development, pilot or launch stages, a closely-followed study shows.
The research by the U.S.-based Atlantic Council think tank published on Wednesday said significant progress over the past six months meant that all G20 countries with the exception of Argentina were now in one of those advanced phases.
Eleven countries, including a number in the Caribbean, and Nigeria, have already launched central bank digital currencies (CBDCs) as they are known, while pilot testing in China now reaches 260 million people and covers 200 scenarios from e-commerce to government stimulus payments.
Two other big emerging economies, India and Brazil, also plan to launch digital currencies next year. The European Central Bank is on track to begin its digital euro pilot ahead of a possible launch in 2028, while over 20 other countries will also take significant steps towards pilots this year.
In the United States, though, progress on a digital dollar is only "moving forward" for a wholesale (bank-to-bank) version, the Atlantic Council's research said, whereas work on a retail version for use by the wider population has "stalled".
U.S. President Joe Biden ordered government officials to assess the risks and benefits of creating a digital dollar in March 2022.
The heavyweight status of the dollar in the financial system means any U.S. move has potentially enormous global consequences, but the Federal Reserve said back in January that Congress, rather than it, should decide whether a digital version is launched.
The global push for CBDCs comes as physical cash use falls and authorities look to fend off the threat to their money-printing powers from bitcoin and 'Big Tech' firms.
Sanctions imposed on the likes of Russia and Venezuela in recent years have been another driver, including even for long-time U.S. allies like Europe, which wants to ensure it has an alternative to the Visa, Mastercard and Swift payment networks.
"Since Russia’s invasion of Ukraine and the G7 sanctions response, wholesale CBDC developments have doubled," the Atlantic Council said, adding that there were now 12 multi-country "cross-border" projects being worked on.
It said that Sweden remained one of Europe's most advanced with its CBDC pilot, while the Bank of England is pressing on with work on a possible digital pound that could be in use by the second half of this decade.
Australia, Thailand, South Korea, and Russia all intend to continue pilot testing this year too.
Despite the growing interest in CBDCs, however, some countries that have launched them - such as Nigeria - have seen a disappointing take-up, while Senegal and Ecuador have both cancelled development work.
