BIS survey shows central banks turning to digital currencies and stablecoins
According to a comprehensive survey by the Bank for International Settlements (BIS) in 2023, 86 central banks around the world are actively developing central bank digital currencies (CBDC). This growing interest shows that countries are working to integrate digital currencies into mainstream financial systems, aiming to modernize payment mechanisms and enhance financial stability.
Source: BIS The black circles represent the Cayman Islands, Dominican Republic, European Central Bank, Fiji, Hong Kong SAR, Macau SAR, Seychelles and Singapore. Jurisdictions are divided into developed economies (AE) and emerging market and developing economies (EMDE) according to the World Economic Outlook classification of the International Monetary Fund (IMF).
CBDC represents a fundamental change in how we think about and use money. Unlike traditional cashless payment instruments such as credit transfers and electronic money, CBDC is a direct liability of a central bank, providing a new form of digital currency. This distinction is crucial because it underpins the trust and stability associated with central banks. The BIS survey shows that more than half of the central banks surveyed are actively working on proofs of concept, with a third of them conducting pilot programmes.
Interest in CBDCs is driven by a variety of factors, including the desire to improve payment systems, support monetary policy and enhance financial stability. Many central banks are focusing on retail CBDC, which is intended for use in everyday transactions by households and businesses. However, wholesale CBDCs are also gaining traction, and these CBDCs are used for transactions between financial institutions and provide new features through tokenization, such as composability and programmability, which may revolutionize interbank transactions.
Source: BIS’s motivations for issuing retail and wholesale CBDC
How do central banks carry out digital transformation?
Stablecoins represent an important innovation across a broad range of crypto asset classes. Unlike traditional cryptocurrencies, stablecoins are designed to maintain a stable value relative to a specific peg, making them more suitable for use in payments. The BIS survey shows that although stablecoins have a smaller market share, they have gained acceptance among traditional financial institutions. High-profile launches like Societe Generale’s EUR CoinVertible and PayPal’s PYUSD illustrate the growing acceptance of stablecoins in mainstream finance.
Source: BIS Overview of countries currently using stablecoins for payment
These developments demonstrate the potential of stablecoins to build bridges between traditional financial systems and crypto ecosystems. However, widespread adoption of stablecoins also poses significant regulatory challenges. If not properly designed and regulated, stablecoins can pose risks to the security and efficiency of payment systems. The BIS survey highlights that two-thirds of the jurisdictions surveyed are actively developing regulatory frameworks to address these issues, emphasizing the need for strong oversight to reduce potential risks.
Source: BIS Regulatory Framework for Stablecoins and Other Crypto-Assets in Various Countries
Is CBDC becoming increasingly important?
From the Bahamas to Nigeria, China to Jamaica, a common theme is the difficulty of adoption faced by countries launching CBDCs. According to the Atlantic Council’s “CBDC Tracker”, 134 countries around the world, accounting for 98% of global GDP, are experimenting with CBDC. However, only 3 countries have officially launched a CBDC, with a further 36 countries conducting pilot programs.
Source: Atlantic Council Global CBDC Overview
Despite talk of faster cross-border transactions, lower business fees and innovative payment methods, demand for the infrastructure many countries have invested millions of dollars in building remains weak. For example, a report from the Federal Reserve Bank of Kansas City shows that three retail CBDCs in the Caribbean have failed to achieve widespread adoption since their launch. As of May 2023, the Bahamas Sand Dollar was used by only 105,000 consumers and 1,500 merchants, and this CBDC accounted for only 0.19% of the total currency in circulation. Eastern Caribbean Monetary Union’s DCash and Jamaica’s JAM-DEX fared even worse, accounting for just 0.16% and 0.11% respectively.
There is still a big problem with CBDC!
Although central banks around the world are working hard to promote the development of CBDCs, many CBDCs still face challenges in practical use. For example:
India's digital rupee was initially launched with high hopes, but six months after its launch, usage plummeted to a tenth of what it was by December 2023.
China’s digital yuan also suffered an embarrassment, with government workers collecting their wages and immediately converting them into cash.
The International Monetary Fund said Nigeria's eNaira had "disappointing" adoption rates within 12 months of its launch, with 98.5% of wallets not being used.
Challenges facing CBDC include lack of awareness and technological barriers, especially among older consumers who are accustomed to using cash. In addition, privacy concerns are also a major reason hindering the adoption of CBDC, with many people worried that digital currencies cannot provide the same anonymity as cash. Limits on the amount of CBDC held by a single consumer and the lack of interest payments also keep consumer interest low.
For CBDCs to really gain traction, they need to offer clear and attractive advantages that existing payment methods cannot match. For example, the Bahamas is developing new rules that would require the central bank to provide application scenarios for the Sand Dollar to mandate the use of CBDC. This success could influence future policy directions in other economies.
Overall, despite the many challenges faced in promoting CBDC around the world, the efforts and innovative policies of central banks demonstrate their commitment to digital currencies. With international cooperation and technological advancement, CBDC and stablecoins are expected to play an important role in the future financial system.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
