Cash Use and Crypto Fears Have Countries Turning to CBDCs

The way people pay for things is changing as the nature of money itself transforms.

Fearing they may one day be left behind as digital, crypto and other currencies not backed by national governments continue encroaching on the use of physical, native fiat, the central banks of over 100 countries around the world have been undertaking a variety of investigative programs meant to research the technical feasibility of launching their own sovereign, virtual currencies backed by a federal banking system.

Industry observers see some of the most critical financial innovations of 2023 as being centered on the development of central bank digital currencies (CBDCs), as well as future-fit experiments with distributed ledger technology (DLT) sandbox initiatives and decentralized finance (DeFi) platforms.

The Asia-Pacific region is leading the charge. While no Asian government has formally launched a CBDC, the world’s two most populous nations, China and India, are both well underway in their experiments, although to admittedly mixed results from their citizens and businesses.

Other nations, including Singapore, Australia, Japan, Korea, and Hong Kong, are already piloting CBDCs, or plan to in 2023.

All G7 economies have successfully moved from the research stage of a CBDC to the development stage.

Fresh off Tuesday’s (Feb. 7) news of the Bank of England’s CBDC initiative, here is what the rest of world is up to, and why it’s becoming more important for central banks to keep pace with the rise of digital and instant payment options.

Retail CBDCs vs Wholesale CBDCs

There are multiple varieties of CBDCs that can be issued by a central bank.

The majority of nations looking into their own sovereign CBDC are considering either a retail CBDC, which can be used by the public for payments, similar to cash; a wholesale CBDC, which can be used by member banks and other financial institutions to transact with each other and move money in real-time; or a hybrid version of the two.

Governments including China, Australia, South Africa, India and Thailand are piloting or have piloted a hybrid CBDC that combines both retail and wholesale capabilities; while the U.S., Canada, Japan and Indonesia are in various stages of researching and developing one.

For its part, the U.K. is focusing on whether or not to launch a retail CBDC by 2030, if only because most of the benefits of a wholesale CBDC are already provided by the Bank of England’s (BoE) Real-Time Gross Settlement (RTGS) omnibus account, which facilitates wholesale payments settlement in central bank money.

Per an earlier PYMNTS report, the RTGS technical architecture includes the ability for a CBDC to be layered into its system if the BoE so chooses.

In contrast to the U.K., various member states in the EU are looking into both wholesale and retail CBDCs.

The European Central Bank (ECB), as a central issuer, is being tasked with creating the so-called digital euro CBDC, while eurozone countries are themselves contributing individually to developments for its use across both retail and wholesale applications.

In November of last year, the banks of France, Singapore and Switzerland together launched Project Mariana, a collaboration trialing their experimental CBDCs and DeFi protocols.

The ECB’s two-year investigation phase into the digital euro CBDC is expected to conclude in October and will result in a decision around the potential development of a digital euro prototype.

Financial messaging system SWIFT has successfully shown that CBDCs and tokenized assets can move seamlessly on its existing financial infrastructure, proving interoperability in cross-border transactions using CBDCs.

A separate cross-border CBDC payment infrastructure also launched this year (Jan. 19) in Davos during the World Economic Forum. Called the Universal Digital Payments Network (UDPN), it is meant to provide global interoperability between regulated stablecoins and CBDCs.

What the International Fuss Over CBDCs Is About

Several factors, some unique to each nation, are behind the growing global interest in CBDCs.

For high income countries, CBDCs are viewed as way to enhance the efficiency and safety of payment systems; while for other nations CBDCs are viewed as a way to better promote financial inclusion and financial stability.

ECB board member Fabio Panetta sees the role of CBDCs as being, “to preserve the role of central bank money in payments by offering an additional option for paying with public money, including where this is not possible today.”

More broadly, the use of crypto and marketplace penetration of other digital assets has forced lawmakers to confront the tangible benefits of technical innovation within national payment systems to improve their efficiency and inclusiveness.

The “Project Hamilton” project from the U.S. proved the technical feasibility of a CBDC able to settle between 170,000 and 1.7 million transactions per second, as well as bring nearly all (99%) transactions to completion in under five seconds. This real-time-equivalent settlement speed is much faster than both the bitcoin and ethereum blockchains and faces little competition elsewhere.

Additionally, the fact that many countries simply do not want to fall behind the curve relative to regional peers or the private sector should also not be discounted as a compelling strategic rationale for investigating a CBDC.