This month The Fintech Times is exploring paytech, meaning any technological innovation that changes the way we pay. One major advancement we could well see sooner rather than later is the introduction of CBDCs.
Central bank digital currencies (CBDCs) are a digital form of money that a country’s central bank can issue alongside cash. Despite the fact that CBDCs haven’t enjoyed significant success where they have been launched so far, it is a concept that has gained traction in recent years, with countries across the world exploring how they could implement them and how they might impact people’s lives.
Much scepticism remains about what a CBDC could actually be used for and how many restrictions central banks could place on people’s money. But the fact remains that some of the biggest countries are taking them seriously. With this in mind, we reached out to experts in the space to ask them: How likely is it that more countries will implement CBDCs soon?
‘We shouldn’t expect countries to switch CBDCs on overnight’
Jeremy Boot, product strategist for digital assets and currencies for banking provider Temenos, explains that CBDCs require significant time, planning and development, but that a lack of launches does not equate to a lack of interest: “Building a brand new monetary system is no small undertaking and is likely to require multi-year planning, prototyping, and assessment of technical, economic, and societal impacts.
“To assure success in major economies there are many different stakeholders to consult with across both the public and private sectors. There are also different use cases to be explored, for example, the use of CBDC for retail or wholesale purposes. For these reasons, we shouldn’t expect countries to switch CBDCs on overnight. We must not make the mistake of thinking that a lack of public launches means there is a lack of interest.
“On the contrary, most countries are very busy preparing the ground for a future of digital money. No country wants to get left behind and they are exploring CBDC to help preserve their domestic currency sovereignty in the digital age. Bigger countries are keen to promote access to and use of their currencies internationally. So many countries around the world continue exploring the topic and are investing significant resources into their projects and there is no sign of this stopping. It is likely we will see more countries launch pilots soon.
“For example, the European Central Bank just announced they’re starting a two-year build phase, although they stress this does not necessarily mean they will subsequently launch.”
86% of central banks are exploring CBDCs
Ashutosh Chauhan, principal consultant at GFT, explains that it may not be unrealistic to see more countries launch CBDCs in the near future: “The probability of an increasing number of countries embracing CBDCs soon is quite significant.
“Many central banks from large economies are actively exploring or developing CBDC initiatives whilst some are already in the pilot phase. As of early 2023, the Bank for International Settlements (BIS) reported that approximately 86 per cent of central banks were in the process of investigating the potential of CBDCs.
“Leading the way in terms of maturity and adoption, China has taken a prominent position in the realm of CBDCs. The Chinese digital yuan claims more than 120 million wallets. India, having launched its CBDCs at the end of 2022, is currently in the pilot phase. The Reserve Bank of India aims to achieve one million transactions per day by the end of 2023. Some smaller economies have been in production for years.”
Bringing ‘stablecoin under regulatory oversight’
Julia Demidova, head of CBDC and product strategy at FIS, also offered her expertise: “Many central banks across the globe are already experimenting with CBDCs and some are quite advanced in putting the necessary infrastructure in place. All central banks have different policy goals, objectives and motivations, which determine the direction of their respective design and technology choices.
“In the UK, for example, the Bank of England’s development of a digital pound is both an exciting and an important development to ensure the UK’s place as a fintech innovator on the world stage and to promote financial inclusion.
“Central banks are actively exploring and testing a variety of CBDC applications across retail, wholesale and cross-border transactions. We are seeing more central banks delving into technology, functionality and use cases such as offline payments, payment versus payment, delivery versus payment and other novel use cases.
“Currently, there is a lot of conversation within the industry surrounding the interoperability of CBDC and other regulated types of money, including tokenised deposits and regulated stablecoins. MiCA regulation by the European Union is set to take off in mid-2024 and will bring stablecoin under regulatory oversight (treating them as regulated liabilities). This is transformative and has the potential to enable instant, risk-free transfers between European nations 24/7 and tackle various use cases.”
Rollout is ‘still many years away for most economies’
Elliot Hentov, head of policy research with the global macro policy research team at State Street Global Advisors, said: “The majority of the world’s central banks are either in pilot stages or exploratory phases. I would not focus too much on the scheduled rollout date which is probably still many years away for most economies.
“However, what matters is the progress on design, infrastructure and governance of future CBDCs. In other words, the implementation stage is less relevant than the preparatory stages where it becomes clear what the scope and application of each CBDC is likely to be.
“Personally, I’m expecting to see several narrowly constrained retail CBDCs to be launched sooner, while the broader unconstrained wholesale CBDCs are likely to take longer.”