Under the auspices of national central banks, central bank digital currencies, or CBDCs, are an attempt to bring some of the purported upsides of private digital currencies to the world of public money. This means that CBDCs will be safe in times of financial crisis.
Several proposed CBDCs could use the same technology, as comparisons are often made with cryptocurrencies. This is not necessarily the case. In fact, unlike the best known blockchain that is used byBitcoin, central banks are likely to control their own private ledgers, in most cases.
How far have plans progressed?
There are few fully developed and deployed CBDCs, but several countries have initiatives at advanced stages. In China, the e-yuan CBDC is one of the most advanced among large economies. In February, the government gave lunar new year red packets containing digital coins to encourage uptake.
One of the few countries with fully deployed CBDC is the Bahamas whose Sand Dollar was piloted in 2019 and launched a year later, as a collaboration between the central bank, Mastercard and Island Pay.
Other leading economies in Europe and North America are still at the exploration stage. In the UK, the Bank of England and the Treasury announced a task force to co-ordinate studies of a potential Brit coin, but it has yet to present any concrete findings. In September, Federal Reserve Chair Jerome Powell said that the central bank would soon release research on the costs and benefits of deploying a CBDC. The idea of a public digital currency has become a hot topic in the US, with similar division reported by Fed officials on the idea of a public digital currency.
Why are governments trying to create CBDCs?
The motivation behind the creation of CBDCs in western countries has been inspired by two possible challenges - the first being due to fears over private companies outstripping regulators powers and the second by geopolitical concerns.
Stable coins that are tied to US dollars have seen a huge increase over the past year. The nominal value of their coins in circulation has gone from less than $30 bn to about $140 bn. There are growing efforts to use stable coin for quick, cheap transfers, despite the fact that much of it is kept within the criptocurrency ecosystem.
Novi, the digital wallet from Meta formerly Facebook, is trialling the pax dollar stablecoin for transfers, including remittances in Guatemala and parts of the US. Concerns about a coin owned and operated by the social network have been central to stable coin regulation, according to the Meta stable coin, diem. Regulators have raised concerns about private stable coin on several fronts, including the challenges they might pose to financial stability and the effectiveness of monetary policy, as well as consumer welfare. Some believe that CBDC could reduce consumers desire to rely on stable coin, or at least provide greater protection for retailers.
There are concerns about China's e-yuan project, one of the more advanced CBDC initiatives. Beijing wants to expand the system ahead of the Winter Olympics in February. Critics in the US have voiced fears that its deployment would allow the Chinese government to block shoppers from using the coin at stores that fell foul of their policies, as well as allow for mass surveillance.
Proponents of CBDCs say that they offer benefits that have often been attributed to stable coin, including lower costs and faster payment settlements than existing systems in some parts of the world. There is a discussion about their ability to implement monetary policy more effectively, such as providing economic stimuli after financial crises.
There is a concern about CBDCs' impact on traditional retail banks. If consumers have access to liquid cash, backed by central banks, CBDCs may be a safe haven in case of economic instability and could lead to bank runs.
There are debates around the ethics of programmable money and the ability to control consumer spending, which could undermine fundamental rights and free choice, as well as concerns around Beijing's control of the e-yuan.
There is a longstanding concern over financial inclusion that has only grown during the pandemic, as efforts to digitise money have been supercharged. CBDCs may be beyond the reach of those with older phones or without access to digital wallets, so they need to be careful to avoid further disenfranchising the old and vulnerable.