Central bank digital currency (CBDC – Central Bank Digital Currency) is emerging as a revolution in the financial industry, promising to provide an alternative to traditional currencies. This article will explore the development drivers, benefits, challenges and impacts of this groundbreaking change.
Defining CBDC and driving trends
Central bank digital currencies (CBDCs) are encrypted versions of fiat currencies issued by governments and managed by central banks, ensuring value is tied to official currencies. CBDCs emerged in response to the growing demand for cryptocurrency trading and the development of blockchain technology.
The COVID-19 pandemic has accelerated the shift from cash to crypto payments, driven by hygiene concerns and cash shortages. This trend has been going on for years, with global banks and financial institutions processing far more transactions in the crypto space than they do in physical branches.
The trend of reducing cash use is also very clear, as evidenced by the fact that in Europe, cash use has decreased by 1/3 from 2014 to 2021, and in Norway, only 3% of transactions use cash. .
At the same time, interest in cryptoassets is growing, with 10% of adults in the UK and 10% of households in some EU countries owning cryptoassets. This shows the urgent need to innovate and modernize the payment system, and CBDC is the potential solution.
Central banks such as the US Federal Reserve System, the Bank of Japan, the People's Bank of China (PBOC), and the German Central Bank (Deutsche Bundesbank) are also looking at CBDC to modernize their systems. currency.
Their goal is to stabilize local payment systems in the face of the rise of global crypto payment solutions, while seizing the opportunity to lead in shaping the future of the financial system.
CBDC models and testing globally
Currently, CBDC is being piloted in many countries with different approaches.
In China, the central bank has introduced e-CNY, relying on private banks to manage digital currency accounts at the 2022 Beijing Olympics. The European Central Bank is also considering issuing a currency. tokenized euro through licensed financial institutions.
Another popular model in the cryptocurrency community is the anonymous token, but has not been fully tested by central banks.
At this time, 134 countries, representing over 98% of global GDP, are exploring CBDC. For example, the Bahamas Sand Dollar, launched in October 2020, became the first CBDC to be officially recognized as legal tender.
Russia is developing a crypto-ruble platform to minimize the impact of international sanctions. Singapore builds a retail CBDC, described as a “tokenized version of today's banknotes and coins”.
Besides, France has completed a 10-month trial with the participation of 500 organizations using CBDC issued by the French Central Bank. While Nigeria launched eNaira in October 2021, becoming the first African country to deploy a CBDC.
In addition to the Sand Dollar, the Eastern Caribbean Central Bank also launched DCash, a digital currency for the region's Monetary Union. Brazil, India, South Africa, Turkey and Saudi Arabia are all in the pilot phase of CBDC development, focusing on both retail and cross-border applications.
Benefits, challenges, and concerns surrounding CBDC
CBDC offers many advantages such as reducing costs, increasing payment speed, and expanding access to financial services for everyone. According to estimates, switching to crypto-finance could help financial service providers save about $400 billion annually.
Besides, CBDC also improves the efficiency of electronic payment systems and provides banking services to people without bank accounts through mobile devices. Additionally, the regulated nature of CBDC also greatly improves payment security and minimizes the risk of fraud.
However, CBDC also faces many challenges. The transaction traceability of CBDCs raises privacy concerns, which could hinder voluntary use by users.
Besides, some early deployed CBDC projects, such as DCash, encountered technical problems during operation. Furthermore, the costs of developing cryptocurrency infrastructure may exceed the benefits in some countries, making the economic problem less feasible.
From testing to deployment: Lessons learned
China has affirmed its pioneering position in the race to develop CBDC with the e-CNY project. Developed by the People's Bank of China (PBOC), e-CNY uses the private banking system for distribution and has made significant progress since testing began in 2019. As of in May 2022, there were more than 260 million e-CNY transactions made, reaching an impressive total transaction value of more than 83 billion yuan. Despite improving payment speed and efficiency, e-CNY still faces concerns about privacy and government surveillance.
The Bahamas with Sand Dollar has demonstrated faster and safer transactions, while increasing financial inclusion for remote communities. However, the remaining challenge is ensuring everyone can access and use this technology, with encryption infrastructure and technology accessibility being major barriers.
In Sweden, the e-krona project has been piloting since 2020 to evaluate the impact of CBDC on the national payment system. The project shows potential to improve efficiency and reduce transaction costs, but is hampered by the need to ensure compatibility with existing payment systems and address legal issues of privacy and security .
Uruguay's e-Peso project (2017-2018) provided insights into how to deploy and manage CBDC, and identified challenges that need to be addressed before widespread implementation, especially security, confidentiality and compatibility with existing financial systems.
Canada has launched the “Jasper” pilot program, which focuses on using blockchain to improve wholesale payments processes. The testing phases show the potential of CBDC to increase the transparency and efficiency of the financial system. However, technological complexity and implementation costs are the main challenges that make it difficult to popularize Jasper.
In Japan, a CBDC trial from 2021 demonstrated the ability of CBDC to operate in tandem with existing payment systems, providing greater flexibility and security for users. However, infrastructure and regulatory issues are the main barriers that need to be resolved for CBDC to become widely available.
Looking to the future of CBDC: collaboration, standardization and preparation
Establishing international standards for CBDCs is necessary to ensure compatibility and efficiency of cross-border transactions. This issue requires global central banks and financial institutions to cooperate to develop common protocols and standards that facilitate the deployment and use of CBDC. This collaboration also plays an important role in preventing cybersecurity risks and fraud, while promoting public trust and acceptance of CBDCs.
To prepare for widespread CBDC adoption, central banks and stakeholders must address many core issues, including: clearly defining the ultimate goal for CBDC adoption versus fiat currencies. traditional, identify target users, clarify the role of central banks in the digital currency ecosystem, assess the resources and capabilities needed for successful implementation, and adapt the framework legal and financial to create favorable conditions for the process of applying CBDC.
The success of widespread CBDC adoption will depend on the results of pilots and a clear, transparent regulatory framework. Although many questions remain surrounding its cross-border use and impact on the tax system, it cannot be denied that CBDCs have enormous potential to reshape the entire global financial landscape.