Central Bank Digital Currencies (CBDCs) have been an integral part of progressive discussions within the cryptocurrency community. CBDCs are virtual representations of the fiat currency of a particular country. They are often based on blockchain technology and are issued and regulated by the country’s official monetary organization. The feature that makes them different from cryptocurrencies such as Bitcoin and Ether is that CBDCs are backed by the central bank’s deposits of the country’s currency and regulated by the central bank, while cryptocurrencies are not.
Cointelegraph discussed with Thomas Trepanier, Director of Business Development for Roxe at Apifiny, a digital platform for financial institutions, the role that CBDCs could play in the global economy. He thought:
“CBDCs enable central banks to provide greater financial inclusion, especially in markets that are struggling to compete globally. CBDCs also eliminate inefficient processes and promote better local and global transparency, especially given the importance of KYC compliance. “
The first CBDC to be officially launched is the Bahaman Sand Dollar issued by the Central Bank of Bahamas on which it was launched 21st of October. The Sand Dollar is a state-backed currency pegged to the Bahamian dollar, which in turn is pegged to the US dollar. According to the official website, Bahamian citizens can use this sand dollar as payment to any merchant with a central bank-approved e-wallet on their mobile device, while the transaction fee is negligible. This property makes the sand dollar a retail CBDC compared to wholesale CBDCs that are tailor-made for the use of financial institutions. NZIA is the central bank’s chosen technology solutions provider to manage the digital currency’s operations.
CoinTelegraph discussed with a representative of the Bahamas central bank, who outlined how as retail CBDC achieve their goal:
“A core objective of Project Sand Dollar is to promote more inclusive access to regulated payments and other financial services for communities without and with few banks and socio-economic groups in the country. As a retail CBDC, Sand Dollar enables us to achieve this goal. ”
Although the Sand Dollar was launched more than 2 months ago, the currency usage in the financial system is not clear. According to an official press releasethe first phase focuses on the private sector, while the second phase, starting in 2021, focuses on government services and public utilities.
While the Sand Dollar is the first CBDC to be officially launched, there are many countries running pilot CBDC programs or active discussions about the introduction of CBDCs, but CoinTelegraph identifies the first 5 CBDCs that could be launched in 2021 and 2022. China’s digital yuan, the digital euro project, the Swedish e-krona, the digital currency of Thailand and the digital currency of Australia.
The Digital Yuan: The Forerunner Among CBDCs
China’s Digital Yuan has a strong chance of being the next CBDC to go live, and the launch will be a milestone for the CBDC movement given the scale in question. The People’s Bank of China has aggressively researched the digital currency and began pilot projects in more than four Chinese cities in 2014, including Shenzhen, Suzhou, Chengdu and Xiong’an worth $ 300 billion. Dubbed Digital Currency Electronic Payment (DC / EP), the country’s future CBDC is backed by the central bank’s yuan deposits.
China is expected to be one of the first major economies to launch their sovereign currency with regulators suggesting that the introduction of the digital currency would allow China to internationalize the yuan and break the US dollar’s monopoly on international payments. Cointelegraph further discussed this aspect with Adrian Huntelar, Customer Success at Coinsquare, a digital asset platform, who said:
“It is the largest pilot digital currency in the world. Among the global economic powerhouses, China has a first-mover advantage thanks to the successful pilot in 4 cities in 2020. It remains an open question whether the success of the Digital Yuan could strengthen China’s role as a player in international finance. “
China’s central bank is too collaborate with the Hong Kong Monetary Authority (HKMA). The two are in the preliminary stages of testing the digital yuan for cross-border payments. The HKMA has partnered with the Bank of Thailand through a joint research project launched in 2019 to address issues with cross-border payments and digital currencies, which is now in its second phase.
Given the significant population in China and the high penetration of mobile internet users, the digital yuan could be the best example of the use cases and feasibility of CBDCs in both retail and wholesale scenarios. According to information released in early November, digital yuan pilots tested more than 2 billion yuan, or $ 300 million in transactions in more than four million separate transactions. While the yuan appears to be the first major currency to be launched in a digitized format, it is concerns about privacy of user data and its use, an aspect that the Chinese government does not seem to be concerned about at the moment.
The digital euro: the first multinational CBDC project
The European Central Bank (ECB) has begun to investigate the prospect of a digital euro. The President of the ECB, Christine LaGarde, said: “We must be ready to spend a digital euro should the need arise.” Due to the nature of the European Union (EU) and its 27 member states, there would be many international and European institutions that should reach a consensus that would meet the expectations of all future stakeholders. An agreement would represent a huge shift in the way European economies operate.
On October 2, 2020, the ECB published a report on the digital euro, highlighting the reasons for issuing a digital euro, the possible effects of the issue and the legal considerations to be taken into account. According to this report, the Eurosystem will decide in mid-2021 whether to start a digital euro project, starting with a research phase.
The report entitled ‘Report on a Digital Euro’ states that one of the goals of the CBDC is to ‘directly influence the consumption and investment choices of the non-financial sector’ through monetary policy to pay on the digital euro.
E Krona: the CBDC of Sweden
The e-krona is the CBDC under development at the central bank of Sweden, the Riksbank. Sweden started testing the e-crown in 2019 in collaboration with Accenture. The e-krona is intended as a retail CBDC and the pilot project aims to show how the general public can use the currency.
After having conducted the pilot tests up to and including 2019 and 2020, the Swedish Riksbank is now explore the feasibility of the country-wide shift to a digital currency. The Bank of International Settlements (BIS) calculated in 2018 that Sweden is the most cashless society in the world, calculated as a percentage of the country’s gross domestic product (GDP). During the pandemic, Swedish cash use dropped to the lowest, which is less than 10% according to research by Riskbank.
This low use of cash indicates that most citizens in the country are already used to digital payment methods, so this would make the transition to using the country’s CBDC more effective and easier for the masses with some extra infrastructure. Swedish Financial Markets Minister Per Bolund has stated that the review should be completed by November 2022.
Thailand: digital Thai Baht
The central bank, Bank of Thailand (BoT), has been one of the leaders in the CBDC movement, naming their own CBDC initiative ‘Project Inthanon’. The BoT has passed phase 3 of the implementation of the digital Thai Baht with their testing with several companies previously in July this year. Two years ago, the BoT even had one proof-of-concept of the digital Baht as a wholesaler CBDC. Eight major banks participated: HSBC, Standard Chartered, Bangkok Bank, Krung Thai Bank, Bank of Ayudhya, Kasikornbank, Siam Commercial Bank and Thanachart. In this proof of concept, the BoT and the participating banks held workshops on design thinking and functionality testing to identify pain points and design solutions.
The technology partner at the time was R3, the blockchain company next to Wipro. Although the Bank of Thailand (BoT) announced in October this year that they have deployed the Ethereum blockchain using the Ethereum development company ConsenSys to develop the proof-of-concept for the digital baht as a retail CBDC. This can pose a number of challenges for retail investors given the high gas costs on the Ethereum network. ConsenSys revealed that the digital Thai baht would be issued through the ERC-20 smart contracts, the standard for ethereum. This has given the BoT an opportunity to consider decentralized financing (DeFi) use cases for their digital baht.
The proactive approach that the BoT has taken in developing their CBDC makes them one of the leaders of the CBDC movement.
Australia: digital Australian dollar
Australia is one of the world leaders in blockchain technology adoption in general. While there is no indication that the Reserve Bank of Australia (RBA) has any plans to launch a retail CBDC, they did have a partnership with Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys to investigate the feasibility of a wholesale CBDC using distributed ledger technology (DLT).
The project is expected to be completed by the end of 2020 and the parties intend to publish a report on the project and key findings in the first half of 2021. This could be followed by a full-fledged launch in the coming years for financial institutions to use, taking into account how the country is adapting to blockchain technologies. Apifiny’s Trepanier supported this hypothesis, saying:
“Australia will most likely be the first to hit the market as the country has long been a leader in blockchain, particularly with well-known banker Blythe Masters’ company, Digital Asset Holdings.”
Rapidly evolving space
There are many other countries that are still in talks about testing and launching their own digital currencies. Countries such as the United States, the United Kingdom and Germany are also in internal discussions about the pragmatic feasibility of their own digital currencies. South Korea is also one of the countries that conducts pilot testing for their own CBDC. Given the influence of the governments working on CBDCs, the digitization of currencies will increase, bringing with it the crypto industry as a whole.