The number of countries exploring CBDCs more than doubled during the pandemic year
- CBDCs are central bank digital currencies operated by federal banks around the world.
- Only five countries have deployed CBDCs so far, but 14 others are conducting pilot programs.
- The US is the furthest from launching its own CBDC amongst the four largest central banks in the world.
In May 2020, only 35 countries were considering having their own centralised cryptocurrency — now 81 counties are mulling over whether or not to throw their hat in the ring, according to the Atlantic Council, an American think tank.
These 81 counties represent over 90% of the world’s gross domestic product (GDP). The pandemic, the surge in interest from ordinary investors, and the price of Bitcoin hitting an all-time high in the last 12 months have changed the landscape considerably.
Source: The Atlantic Council
|Status of CBDC||Number of countries|
The reasons behind why a country is looking to launch a CBDC varies from economy to economy — some want to replace private cryptocurrencies, others just want to be a part of the ecosystem.
For India, the road is still uncertain. According to the report, India falls within the ‘research’ category. The country’s crypto bill is still pending. Meanwhile, the original draft, which was seen in February proposed the Reserve Bank of India (RBI) launching its own digital rupee — the fate of private cryptocurrencies still in limbo.
Full-scale implementation limited to Caribbean countries
China is ahead of the rest of the world when it comes to CBDCs. Its digital yuan is currently being tested nationwide, across multiple use cases including medical insurance, and allowing use by foreign nationals.
Alongside China, 14 other countries are running pilot projects of CBDCs, including South Korea and Sweden.
Meanwhile, full-scale implementation of a CBDC has only happened in five countries — the Bahamas, Antigua and Barbuda, Saint Lucia and two Carribean countries. “Without new standards and international coordination, the financial system may face a significant currency exchange problem in the future,” said the Atlantic Council’s report.
The US has some catching up to do
Meanwhile, the US only began to take the idea seriously in May this year. The Federal Reserve announced that it will release a research paper this summer to explore the possibility of the CBDC.
Amid the comparison of the world’s largest economies, even the European Central bank, the Bank of Japan and the Bank of England are ahead of the Fed, according to the Atlantic Council’s report.
Growing interest in CBDCs is not a surprising turn of events
According to Mckinsey, middlemen facilitating virtual payments around the world made as much as $2 trillion from their services in 2019 alone.
Ironically, blockchain and cryptocurrencies were meant to remove these middlemen from financial systems around the world. In fact, Satoshi Nakamoto’s paper on Bitcoin, which kickstarted the crypto industry, aimed to solve this problem.
Countries' interest in CBDCs is growing alongside increasing interest in cryptocurrencies in general. The market, though volatile, has seen unprecedented gains over the past year, which concerns many central banks.
“Usually, certainly for the most popular ones now, they do not represent any person’s debt or liabilities. There is no ISSUER. They are not money (certainly not CURRENCY) as the word has come to be understood historically,” T. Rabi Sankar, the deputy governor of the Reserve Bank of India, India’s central bank, said during an address about CBDCs and cryptocurrencies last week.
Sankar is amongst many central bank executives who have been concerned about the volatility of crypto markets, and the fact that countries cannot control them. CBDCs are a solution to that, allowing countries to take advantage of blockchain platforms, but avoid the volatility of crypto.
Cryptocurrencies vs CBDCs
That said, cryptocurrencies and CBDCs aren’t truly comparable. The primary difference is in the fact that most cryptocurrencies are based on public blockchain platforms, which allow anyone to “mine” them. Mining is the process of authenticating crypto transactions, which in turn create new crypto tokens and provide revenue to the miners.
Public blockchains can be tracked by anyone, which offers a level of transparency that’s missing from our general financial systems. CBDCs, on the other hand, are based on private blockchains that are wholly owned and operated by the central banks, or other authorities. This means that while transparency will be available to the government, no one else will be able to access these records.
The use of private blockchains also affects interoperability. CBDCs at the end of the day are digital representations of fiat currencies, which means they will have to operate with other world currencies. “The growth trajectory, financial stability implications, and geopolitical consequences of the e-CNY will depend on how the People’s Bank of China (PBOC) and other state organs resolve important structural details regarding its underlying network,” wrote Robert Greene, non-resident scholar at the Carnegie Endowment Centre.
“One big question is whether Beijing will allow e-CNY transactions with US-sanctioned entities, such as affiliates of Iran’s Islamic Revolutionary Guard Corps. Central bankers should consider the trade-offs of state-sponsored digital currencies, and the U.S. national security community should watch the e-CNY’s rollout closely,” he added.
For a more in-depth discussion, come on over to Business Insider Cryptosphere — a forum where users can deep dive into all things crypto, engage in interesting discussions and stay ahead of the curve.
India finally explains its problem with private cryptocurrencies and why it is coming up with its own CBDC
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