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PERSPECTIVES

Look out Venmo, CBDCs are on the way



More than 100 countries, representing 95% of global GDP, are currently exploring central bank digital currencies (CBDCs), according to Visual Capitalist. Unlike decentralized blockchain currencies, such as Bitcoin, these blockchain-based currencies would be similar to centralized fiat currencies. They would have the same value as the local cash currency and be backed by the full faith of the government, but would not have a physical form.

 

QUICK TAKES

  • 42% of the 112 countries in a recent survey are in the research stage of exploring CBDC. (Atlantic Council, CBDC Tracker)

  • 10% have launched CBDC, while another 13% have a pilot program in progress and 23% are in the development stage. (Atlantic Council, CBDC Tracker)

  • The US Federal Reserve is currently researching the feasibility of a US CBDC. (federalreserve.gov)

 

A central bank digital currency is generally defined as a digital liability of a central bank that is widely available to the general public. CBDC would let consumers make digital payments directly to a vendor without going through traditional banking or credit card methods and, thus, without incurring banking fees. In other words, CBDCs combine the accessibility of mobile payment apps with the verification powers of blockchain-like networks and, thus, help bridge the gap between dollar-based fiat currency and crypto-based ethereal currency. If CBDCs become widespread, traditional banks could find themselves cut out of the lucrative online transaction process.


CBDC currencies are particularly attractive in emerging economies, where large segments of the population do not have access to traditional banks. For example, Nigeria, where half of its 200 million population is believed to have no access to bank accounts, became the first African country to launch a CBDC in October 2021.


CBDCs are currently less attractive in mature economies with extensive banking systems. Of the G7 economies, the US and UK are the furthest behind on CBDC development. However, 19 of the G20 countries are exploring a CBDC, with 16 already in development or pilot stage. This includes South Korea, Japan, India, and Russia. Each has made significant progress during 2022.


Economies without an identifiable need for CBDCs are hesitating to jump into the pool. Challenges not only include security and privacy concerns, but the fact that there are currently no international standards. This last concern might actually be the factor that pushes mature economies into the CBDC market. First movers in technology often set the standard by default. China and Russia are currently experiencing first mover advantages, which concerns North American and European governments. Whether the Fed wants a CBDC option or not, it might be forced into the technology simply to counter the influence of Russia and China. In fact, it is currently working on a secure US CBDC proposal.


William Luther, an assistant professor of economics at Florida Atlantic University and director of the Sound Money Project, a financial stability and privacy research group thinks the technology will probably be a nationwide option soon. “Depending on how quickly Congress and the president want to roll it out, an American digital dollar could be launched in the next two years,” he says.


(Photo credit www.visualcapitalist.com/visualized-the-state-of-central-bank-digital-currencies)