Innovation

Central Bank Digital Currencies (CBDCs) in 2024

Central Bank Digital Currencies (CBDCs) have received attention in recent years as central banks worldwide explore the potential to evolve the way we conduct financial transactions.

With the rise of digital payments, cryptocurrencies, and fintech innovations, CBDCs represent a new frontier in the evolution of money. This article covers what CBDCs are, how they have evolved until 2024, their impact on payments, and the future they could shape.

What Are CBDCs?

A Central Bank Digital Currency (CBDC) is a digital form built on blockchain technology of a country’s fiat currency issued and regulated by the central bank. Unlike cryptocurrencies such as Bitcoin or Ethereum, which are decentralized and not controlled by any single entity, CBDCs are centralized digital assets controlled by the government. They are designed to function as legal tender, offering the same utility as physical cash but in a digital format.

CBDCs can be categorized into two types:

Retail CBDCs: These are intended for use by the general public, similar to how we use cash or bank deposits. Retail CBDCs could be used for everyday transactions, from buying groceries to paying for services online.
Wholesale CBDCs: These are designed for financial institutions and are used for large-scale transactions, such as interbank transfers or cross-border payments. Wholesale CBDCs could enhance the efficiency of the financial system by reducing settlement times and lowering costs.

CBDC Initiatives in Different Countries

As of 2024, over 130 countries, representing more than 98% of global GDP, are exploring CBDCs. Among these, 11 countries have fully launched CBDCs, while many others are in various stages of development or pilot programs. Here’s the complete list of the 11 countries:

Bahamas – Sand Dollar
Nigeria – eNaira
Eastern Caribbean Currency Union (ECCU) – DCash (involving 8 countries: Antigua and Barbuda, Dominica, Grenada, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Anguilla, and Montserrat)
Jamaica – Jam-Dex (Jamaica Digital Exchange)
China – Digital Yuan (e-CNY)
Cambodia – Bakong
Marshall Islands – Sovereign (SOV)

The interest in CBDCs is not confined to any particular region; it spans across continents, with both developed and developing countries recognizing the potential benefits.

CBDC Initiatives in the USA

In the United States, the Federal Reserve is spearheading efforts to explore the potential of a digital dollar. Through initiatives like Project Hamilton, a collaboration with the Massachusetts Institute of Technology (MIT), the Federal Reserve is investigating the technical feasibility of a CBDC, focusing on creating a secure and scalable infrastructure.

The Federal Reserve’s research highlights the potential benefits of a digital dollar, such as enhancing payment efficiency, reducing transaction costs, and maintaining the global dominance of the U.S. dollar. However, the U.S. approach also acknowledges significant challenges, including privacy concerns, cybersecurity risks, and the impact on financial stability.

The Federal Reserve has engaged in public consultations and published discussion papers to gather feedback from a wide range of stakeholders. Any decision to issue a CBDC in the U.S. will likely require legislative approval from Congress, adding a layer of complexity to the process and ensuring that the decision is thoroughly considered from all angles.

CBDC Initiatives in Canada

Canada is taking a measured approach to the development of a Central Bank Digital Currency (CBDC), with the Bank of Canada (BoC) leading the research and exploration efforts. The BoC has engaged in several initiatives, including Project Jasper, which examines how distributed ledger technology (DLT) could be integrated into the country’s payment systems.

Through these initiatives, the BoC aims to understand how a digital Canadian dollar might function alongside existing payment methods and what benefits it could bring, such as enhancing financial inclusion and improving payment efficiency.

Public consultations launched in 2023 reflect the BoC’s commitment to gathering input from Canadians to shape the potential design and features of a CBDC. Despite these advancements, the BoC has not yet committed to issuing a CBDC, emphasizing that such a move would only occur if it proves to be safe, resilient, and beneficial to the Canadian economy.

CBDCs in Other Countries

China: The Digital Yuan (e-CNY) is one of the most advanced CBDC projects. Launched by the People’s Bank of China, the digital currency has been tested in numerous cities and is being gradually integrated into the national payment system.
Europe: The European Central Bank (ECB) is actively working on a digital euro. While still in the research phase, the ECB aims to address the challenges of digital payments and ensure that Europe remains competitive in the global financial landscape.
Bahamas: The Sand Dollar, launched in 2020, is one of the world’s first fully operational retail CBDCs. It was introduced to promote financial inclusion in the country, especially in remote areas where access to banking services is limited.
Nigeria: The eNaira, launched in 2021, is another example of an operational CBDC aimed at boosting financial inclusion and reducing the cost of cash management in Nigeria.

CBDCs in Payments: Benefits and Challenges

CBDCs have the potential to transform and benefit the payments landscape in several ways:

Financial Inclusion: CBDCs can provide unbanked and underbanked populations with access to the digital economy. According to the World Bank, around 1.7 billion adults globally do not have access to a bank account. By offering a digital currency that requires only a smartphone, central banks can reach these populations, especially in regions where traditional banking infrastructure is lacking.
Payment Efficiency: CBDCs can streamline payment processes by reducing the need for intermediaries, such as banks or payment processors. This can lead to faster transactions, especially for cross-border payments, which currently suffer from delays and high fees. The Bank for International Settlements (BIS) estimates that cross-border payment costs could be reduced by up to 50% with the adoption of CBDCs.
Monetary Policy Implementation: CBDCs could provide central banks with more direct tools for implementing monetary policy. For example, during economic downturns, central banks could issue CBDCs with programmable features, such as negative interest rates, to encourage spending and stimulate the economy.
Reduction of Fraud and Illicit Activities: CBDCs, being digital and traceable, could help reduce fraud and money laundering. By providing a transparent and traceable transaction history, CBDCs could make it more difficult for illegal activities to go unnoticed. According to a report by the Financial Action Task Force (FATF), the traceability of CBDCs could significantly improve anti-money laundering (AML) and counter-terrorism financing (CTF) efforts.

Challenges with CBDCs

Privacy Concerns: The traceability of CBDCs, while beneficial for reducing illicit activities, also raises significant privacy concerns. Users may be wary of a system where every transaction is monitored by the central bank. Finding a balance between privacy and transparency is one of the key challenges that central banks must address.
Cybersecurity Risks: As with any digital system, CBDCs are susceptible to cyberattacks. Ensuring the security of a CBDC system is paramount, as any breach could have widespread implications for the financial system. The European Central Bank has highlighted cybersecurity as one of the critical areas of focus in its ongoing research on the digital euro.
Disruption to the Banking System: CBDCs could disrupt the traditional banking system by reducing the need for commercial banks as intermediaries in the payment process. This could lead to a reduction in bank deposits, impacting banks’ ability to lend and potentially destabilizing the financial system.
Technical and Operational Challenges: Implementing a CBDC requires significant investment in technology and infrastructure. Central banks need to develop robust systems that can handle the scale of national or even global transactions while ensuring reliability and resilience. The Bank of Canada, in its research on CBDCs, has identified the need for a scalable and secure infrastructure as a major technical challenge.

CBDCs and the Future of Payments

The adoption of CBDCs could reshape the global payments landscape in profound ways. Some potential future scenarios include:

1. Decline in Cash Usage: As CBDCs become more widely accepted, the use of physical cash could decline. This shift could reduce the costs associated with cash production, distribution, and security. However, it also raises concerns about the accessibility of digital payments for older populations and those without access to digital devices.

2. Enhanced Cross-Border Payments: CBDCs could facilitate faster and cheaper cross-border payments by reducing the number of intermediaries involved in the process. The International Monetary Fund (IMF) has highlighted the potential for CBDCs to address the inefficiencies of the current cross-border payment system, which often involves multiple currencies and high transaction costs.

3. Programmable Money: CBDCs could introduce the concept of programmable money, where funds can be programmed to be spent only on certain items or within a specific timeframe. This could be used for government subsidies, welfare payments, or even corporate incentives, ensuring that funds are used as intended.

4. Integration with Emerging Technologies: CBDCs could be integrated with other emerging technologies, such as blockchain, the Internet of Things (IoT), and smart contracts, to create new financial ecosystems. For example, a CBDC could be used in IoT-enabled devices to facilitate automatic payments in real-time, such as tolls or utility bills.