on the crypto
Plans for CBDCs are in various stages around the world, but because central banks are showing renewed interest ininvest for digital currency?
With the use of physical liquidity dwindling, particularly after a year of freezing, interest has once again turned to central bank digital currencies (CBDCs). Over 60 central banks have reviewed CDBCs since 2014, with several already in the testing phase. The Bank of Japan has started a one-year trial of its digital yen and the People's Bank of China has tested its digital yuan in cities including Shenzhen, Chengdu and Suzhou, as well as holding a "digital wallet lottery". Plans are underway to allow visitors to use the digital yuan at the 2022 Beijing Winter Olympics.
Less immediate need for CBDC in developed countries
In Europe, CBDC developments are slower. The European Central Bank has studied the potential uses of an EU-wide CBDC, but it would take at least another four years to achieve the results if it ever was launched, according to President Christine Lagarde. In the UK, the Bank of England CBDC task force is evaluating the "benefits, risks and practicalities" of creating a so-called "Britcoin". A key element of their work is to identify if there is a use case for a CBDC.
The above projects lack something that the Bahamian CBDC had the Sand Dollar when it was introduced: quickly restoring banking services in the outer islands in the wake of Hurricane Dorian in 2019. The Central Bank of the Bahamas' response was a currency. storm-proof mobile phone-based digital technology, which has become the world's first fully functional CDBC. The Sand Dollar allowed Bahamian citizens to send and receive money electronically without the need for a bank account. It has provided a form of money that can be used between islands and offline, making it possible to transmit small amounts over the phone, much like handing someone a five dollar bill.
CBDC in development in emerging economies
Perhaps unsurprisingly, many CBDC projects are underway in emerging economies including Cambodia, Ukraine, Uruguay, Ecuador and Turkey. Facilitating financial inclusion is a key factor in their CBDC programs to help bridge the gap with the unbanked. For developed countries, the modernization of the banking system is an obvious benefit of CBDCs, and the Bank of England has made it clear that keeping pace with the digital economy is a key factor in its plans. However, there is skepticism that CBDCs can meet a wider need in Western democracies with mature banking systems.
Western democracies are keeping pace to avoid unrest
Indeed, much of the interest in CBDCs revolves around governments wanting to retain control over monetary systems that they fear are ripe for the disruption of digital assets. Applications, especially stablecoins and DeFi protocols, are of particular interest to central banks as they allow for quick payments with little or no transaction fees, attractive peer-to-peer financing solutions, and are largely protected from the volatility of prices of other digital assets.
Corporations are becoming increasingly cashless and interest in digital assets is steadily increasing. States must find ways to compete or risk seeing private currencies erode their monetary policy, and CBDCs could be the answer to supplement, rather than replace, physical money in the system.
