The crypto currency market is increasingly inspiring sovereign central banks to mint national digital fiat.
“Digital assets are not on trial. Fraud and organizations are on trial,” said U.S. Sen. Cynthia Lummis during a Senate Banking Committee hearing Wednesday (Dec. 14) on the collapse of cryptocurrency exchange FTX.
At the same time, interest in separating offshore crypto trading houses from federally run digital currency banking appears to be gaining some serious runway. Central bank digital currencies (CBDCs) are being experimented with across global jurisdictions, with many leading central banking systems starting to pilot proof-of-concept exercises to test the potential of next-generation digital currency payment infrastructure, as well as hoping to uncover preliminary learnings necessary for drafting the corresponding regulations for state-sanctioned digital currency use.
More than a dozen nations, from India to Nigeria, Sweden, Japan, the United States and China, are now undertaking trial programs to investigate the potential future benefits, pitfalls and use cases of establishing their own CBDCs.
The Atlantic Council found that a vast majority of the world’s central banks have indicated interest in looking into CBDCs, noting that 11 nations have already fully launched a CBDC and 17 others are currently in some stage of trialing one. In total, 72 nations are reported to be in the research and development phase, while just two nations, Senegal and Ecuador, have canceled their efforts.
Pilots Take Flight
Spain’s central bank announced Dec. 5 an open call for industry proposals to participate in a digital currency experiment.
Separately, the New York Federal Reserve and a consortium of leading U.S. banks and financial service companies likewise announced that they plan to undertake a 12-week pilot program to test the feasibility of digital asset transactions that connect deposits at regulated institutions.
Brazil is also hoping to launch a national digital currency in 2024. This is the second delay for the project, which was originally planned for this year but in June was pushed back to 2023. Representatives of the Central Bank of Brazil have said the project is aimed more at financial innovation rather than exploring a specific benefit, such as real-time payments.
Nigeria last year launched its CBDC and corresponding currency, the eNaira, and has gone so far as to limit ATM cash withdrawals in the country so as to encourage its citizens to use the national digital fiat. Nigerian merchants said the attraction of using eNaira versus traditional fiat options is lower fees relative to the transaction processing margins of other payment methods.
Nigerian merchants aren’t alone in this sentiment. According to a June PYMNTS report, “Paying With Cryptocurrency: What Consumers and Merchants Expect From Digital Currencies,” 77% of U.S. merchants who accept digital currency see the appeal of crypto transactions over standard payment methods.
The Bank of England is getting into the fray as well, despite the prospect of a so-called “digital pound” not finding much support in parliament. The cross-party Lords Economic Affairs Committee labeled CBDCs as “a solution in search of a problem” in a recent report. The committee did indicate greater openness to a wholesale CBDC for use between financial institutions (FIs), which is, generally speaking, the most common use case being explored across those nations investigating CBDCs.
India, however, is finding little mainstream success with its wholesale “digital rupee” project. The nation’s bankers have actually noticed a downside to the initiative. Each trade using the CBDC needs to be settled individually, while transactions using the existing interbank network are able to be handled in bulk. India’s central bank remains unfazed and is reportedly looking at the potential for retail use of the digital rupee.
Ukraine’s central bank has also detailed a CBDC project. The country has been exploring launching a digital version of its national currency, the eHryvnia, since 2018.
Further out in the eastern hemisphere, the Bank of Japan is set to test a CBDC next year, while the Bank for International Settlements (BIS) and the Hong Kong Monetary Authority announced the results of their already-completed CBDC experiment which showed that CBDCs can work together with private stablecoins.
Not everyone is going it alone. Earlier this month, the banks of France, Singapore and Switzerland announced a six-month experiment involving hypothetical CBDCs from each country. Called Project Mariana, the initiative is meant to test the viability of cross-border CBDC trading and settlement.
Singapore’s Monetary Authority has separately debuted its own program, Ubin+, a wholesale CBDC.
These CBDC protocols being piloted are meant to prepare sovereign nations for a new generation of financial infrastructures, determining geopolitical efficiencies as well as unpacking how other digital asset ecosystems might be affected — and regulated.
“Our hopes are that we learn how to transfer value, 24/7, using an industry ledger that gives flexibility to our clients and decreases latency, while increasing certainty and speed — and operates within the two-tiered, regulated, banking system as it exists today,” TD Bank’s Jon Prendergast told PYMNTS in a conversation earlier this month.
TD Bank is participating in the New York Fed project.
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