Central Bank Digital Currencies (CBDCs) have been a hot topic in 2020 so far, with a number of countries expressing interest in the concept. China has already started its plans for its CBDC, the digital yuan. More recently, international financial authorities and 20 of the world’s largest economies have published a report establishing official standards for regulating and issuing sovereign digital currencies. Indeed, CBDC initiatives are popping up all around the world.

An international coordination effort

The Group of Twenty (G20) — an organization of finance ministers and central bank governors representing the European Union and 19 countries across every continent —  is working with the International Monetary Fund (IMF), the World Bank, and the Bank for International Settlements (BIS) to formalize the use of central bank digital currencies in banking systems.

By the end of 2022, the G20 members, the IMF, the World Bank, and the BIS will have completed regulatory stablecoin frameworks, research, and selection of CBDC designs, technologies, and experiments. The IMF and the World Bank will have the technical capabilities to facilitate CBDC transactions between the countries by the end of 2025.

The G20 countries will examine the scope for new multilateral platforms, global stablecoin arrangements, and central bank digital currencies in an attempt to address the challenges that cross-border payments face today -  without compromising minimum supervisory and regulatory standards to control possible risks to monetary and financial stability. In a dedicated report, they clarified that vital components of sound CBDCs include convertibility, convenience, security, speed, scalability, legal soundness, and several other categories.


China is  leading the race

The People's Bank of China (PBOC), the country's central bank, has already processed 1.1 billion yuan (~$162 million) worth of digital currency in pilot transactions. 3.13 million transactions have already been processed using the digital currency as of late August. More than 6,700 use cases of digital yuan have already been tested, including bill payments, transport, and government services. More than 113,300 personal digital wallets and about 8,800 corporate digital wallets have already been opened as part of the pilot transactions.

The pilot programs are running in major cities. Pilots will also be conducted at the coming Winter Olympics in 2022. China’s Commerce Ministry announced that it will expand the trials of the nation’s central bank digital currency to include Beijing. The pilot will also expand to the Hong Kong Greater Bay area. China’s CBDC is known domestically as a digital currency electronic payment (DCEP) and is by many expected to be the first operational national digital currency.


Leading Asian tech-hubs

With its big neighbor increasing efforts to lead developments in Central Bank Digital Currencies, other Asian countries are following suit.

The South Korean central bank (BoK) will begin the distribution phase of its central bank digital currency pilot scheme in 2021. This 22-month CBDC pilot scheme launched in March of 2020. Distribution is the third and final phase of the program and would seem to be on schedule with the roadmap presented at the scheme's launch.

Despite solid progress on the pilot program, the BoK maintains that it has not currently confirmed plans to launch a CBDC once the pilot is completed. Rather, it wishes to be fully prepared to take such measures if market conditions, either nationally or globally, were to change suddenly.

Other Asian countries, such as the Philippines, see digital currencies as a means to reduce the use of fiat money and improve the delivery of financial services in their country. Looking intensively into CBDCs, these countries could be next to launch their initiatives.


Europe remains a serious contender

Central Bank Digital Currencies are also gaining momentum in Europe. Sweden was one of the first countries testing its digital currency, the e-krona in late February. While other European countries are less eager to implement/test a digital version of their money, the European Central Bank (ECB) slowly begins to seriously consider and study the digital euro - with the goal of having something more concrete by mid-2021. By this time next year, the ECB may start a virtual currency program, possibly with an investigation phase to develop the digital euro - a term rather used than cryptocurrency/asset - and conduct experiments. A digital euro could support the Eurosystem’s objectives by providing citizens with access to a safe form of money in the fast-changing digital world.

This would contribute to Europe's strategic autonomy by providing an alternative to foreign payment providers for fast and efficient payments in Europe and beyond, as well as bolster the euro's international standing as a reserve currency.

Have a look at our recent post regarding Digital Euro public consultation 👈


USA trying to catch up

While a survey of US citizens found that only 25% of respondents were in favor of a CBDC, the government is doing its part to stay ahead of the developments. The Federal Reserve Bank of Cleveland has revealed details of the Fed’s ongoing research into a potential digital dollar. The US central bank has been exploring CBDCs since before the pandemic. This includes initiatives from regional Federal Reserve branches, counting a multi-year partnership between the Massachusetts Institute of Technology (MIT) and the Boston Fed, in addition to collaboration between the Fed’s New York Branch and the Bank for International Settlements.

Moreover, the Covid pandemic has resulted in significant disruptions to various infrastructures of the US, such as the payments sector, and had resulted in major changes to the patterns and volume of domestic transfers. In this way, the current sanitary and economic conditions are putting even more pressure on the US government to react to the CBDC topic. Their northern neighbor, Canada, is already keen to launch a CBDC, with its central bank being in the process of developing a digital currency.


A globally sensitive subject

The maturity of public financial institutions on CBDC has been growing fast in the last few months, that almost all major central banks are involved in research studies or pilot programs. However, it's interesting to observe all their precautions to avoid giving any launch date despite all the progress made.

The reality is CBDC remains a highly sensitive topic. Financial institutions are obliged to take up the issue while being worried about the potential impact on our existing financial and banking industry. In any case, our financial industry is to be disrupted by these emerging forms of digital currencies. Countries with a weaker domestic currency will be naturally more interested in CBDC as it represents an opportunity to challenge US currency leadership.

It will be interesting to monitor how these institutional initiatives might converge with the promising decentralized finance sector. As blockchain and crypto-assets are built on top of interoperable technologies, it seems to be a compulsory step for CBDC and DeFi to disrupt the FinTech industry together, and more generally our financial system.

For further information, you can have a look at our recent post regarding 👉 Political issues around CBDCs.


Sources:

Banks should be ready with CBDCs if Libra is blocked: BoC exe - Cointelegraph; Oct 16, 2020 [1]

IMF, World Bank, G20 Countries to Create Central Bank Digital Currency Rules - Coindesk; Oct 13, 2020 [2]

Central banks detail CBDC expectations in massive joint document - Cointelegraph; Oct 09, 2020 [3]

South Korea's digital won to begin distribution phase next year - Cointelegraph; Oct 07, 2020 [4]

China's digital currency has already been used in pilot transactions worth $162 million - TheBlockCrypto; Oct 06, 2020 [5]

ECB to consider further digital euro study in 2021 - Cointelegraph; Oct 04, 2020 [6]

Digital Euro Will ‘Protect’ Eurozone From Foreign Issuers, Says ECB Exec - Coindesk; Oct 2, 2020 [7]

Federal Reserve Bank reveals details of digital dollar research - Cointelegraph; Sep 24, 2020 [8]

China Expands Digital Yuan Trials to Beijing and Neighboring Provinces - Cointelegraph; Aug 14, 2020 [9]