Pop Quiz! When did “digital money” come into widespread use? 1990s? 2000s?
Nope. It was in 1871 after Western Union offered electronic fund transfer (EFT) in the U.S. In the 1990s, the internet facilitated an explosion in online electronic payments. In this century, we’re seeing cryptocurrency adoption rates increase. It’s no surprise that people are asking when digital currency will replace money.
That brings us to the hot topic of Central Bank Digital Currency (CBDC), government-issued digital money that has the potential to revolutionize global finance and citizens’ financial transactions. What is the status of CBDC adoption worldwide? Let’s take a look.
What is a CBDC?
CBDCs are central bank digital currency issued and regulated by the central bank. Unlike cryptocurrencies such as Bitcoin or stablecoins like Tether, CBDCs are centralized and backed by the full faith and credit of the issuing government.
One of the critical distinctions of CBDCs is their ability to enhance the efficiency, security, and inclusiveness of the payment system. Unlike cryptocurrencies, which can be highly volatile, a CBDC offers a stable and universally recognized medium of exchange.
While this post doesn’t have space to cover all the ways CBDCs differ from other forms of digital currencies, this chart provides a helpful overview.
CBDCs also introduce controversial innovations in the way governments might control different currency characteristics. We’ll examine those more in-depth in this post.
If you are interested in a deeper analysis of CBDCs’ global implications, the International Monetary Fund provides more information here: The Status of Central Bank Digital Currencies pdf.
Global Overview of CBDC Progress
As the world embraces digital transformation, CBDCs have become a focal point for many nations seeking to modernize their financial systems.
Only a few countries have successfully launched CBDCs. The Bahamas, Jamaica, and Nigeria are pioneers in this space. These early adopters have implemented CBDCs for various reasons, driven by unique economic and financial needs. Some of these reasons include:
- Improve financial inclusion.
- Offer an efficient digital payment solution that reaches all residents, regardless of location.
- Enhance economic growth and stability while curbing the informal economy.
- Modernize payment systems and improve financial access.
- Reduce the cost of cash management.
- Enhance the efficiency of cross-border transactions.
Beyond these pioneering nations, many other countries are actively exploring and testing CBDCs. The Atlantic Council CBDC Tracker is an excellent central bank digital currency list of countries working on CBDC implementation.
Key Statistics from the Atlantic Council CBDC Tracker
CBDC initiatives are spanning Asia, Europe, Africa, and the Americas. Below is a brief overview:
Implemented CBDCs: Three countries—the Bahamas, Jamaica, and Nigeria—have fully implemented CBDCs.
Pilot Programs: 36 countries are conducting pilot programs to test the feasibility and functionality of their CBDCs.
Research and Development: Over 74 countries are in various stages of research and development, exploring the potential benefits and challenges of implementing a CBDC.
The Status of Central Bank Digital Currencies in Key Regions
United States
The United States is actively exploring the potential of a digital dollar, although it has no confirmed CBDC launch date. The US Federal Reserve is conducting research, pilot programs, and stakeholder collaborations to evaluate technological and regulatory aspects.
Proponents insist the US is falling behind in financial innovation because it is not moving ahead with a CBDC. Opponents cite disruption to the existing financial system, invasion of privacy, and the potential for government surveillance of citizens as significant concerns.
In May 2023, The House passed a digital currency bill prohibiting the Federal Reserve from issuing a CBDC without congressional approval. The U.S. aims to ensure that any future CBDC enhances the existing financial system without compromising privacy or national financial stability.
Russia
Russia has a pilot testing currently underway. The ongoing conflict with Ukraine has affected the country’s economic landscape, influencing the urgency and direction of its CBDC efforts.
Europe/EU
The European Central Bank (ECB): The ECB has completed a comprehensive study phase and is now exploring more advanced stages of practical applications of the technical and regulatory requirements. Pilot projects and public consultations are ongoing, with no launch date specified.
China
China has been extensively piloting its digital yuan (e-CNY) since 2019. Domestically, the People’s Bank of China has undertaken large-scale trials in several major cities, allowing millions of consumers and businesses to use the digital yuan for everyday transactions. While China is a frontrunner in implementation, their authoritarian integration of social surveillance with CBDC use is at odds with values in Western countries.
Each region creates a fascinating showcase of different stages and approaches to CBDC development, reflecting its unique economic priorities, technological capabilities, and positioning on the world stage.
Objections to CBDCs
While Central Bank Digital Currencies (CBDCs) promise numerous benefits, they face significant objections and concerns. Critics argue that CBDCs could introduce risks to privacy, data protection, and the financial stability of existing systems.
Below are some of the critical objections to CBDCs, drawing on insights from the Cato Institute and financial blogger Lyn Alden’s inclusion of the status of digital bank currencies essay “What is Money?”
Financial Privacy Concerns
One of the most significant objections to CBDCs is the potential erosion of privacy. Unlike anonymous cash transactions, digital transactions can be easily tracked and monitored.
A government-issued digital currency would allow central banks and authorities unprecedented access to individual financial data, leading to concerns about personal privacy and the potential for abuse by authorities.
For example, you can program CBDCs with restrictions, such as spending money only on certain items, with specific vendors, or within geographical boundaries. While this could be a way to create targeted economic stimulus, when combined with social tracking data, it can also be used to punish individual behavior.
In China, for example, experiments with digital yuan include features that link spending behavior to social credit scores, restricting access to funds for individuals deemed to have engaged in undesirable activities. This dual-use potential highlights the importance of balancing economic innovation with protections for individual freedoms.
CBDCs: “Financial inclusion” as tax enforcement in developing countries
According to the International Centre for Tax and Development in developing countries, “CBDCs provide greater transparency, security, and traceability, which could help tax authorities track income and net worth, detect tax evasion, and increase tax revenue.”
While a properly implemented CBDC can “increase financial inclusion,” it won’t fix a broken system without significant reform of underlying problems. In countries with bloated bureaucracies and a history of cronyism and government corruption, citizens resist paying taxes because they don’t believe it will result in a net benefit to society.
For example, in Mexico in 2022, 60% of transactions were in cash. Citizens have low confidence in the tax bureaucracy. Banks have predatory interest rates, especially as they roll out credit card promotions to a population with low financial literacy. From farmers to landlords to taco stand owners, citizens don’t necessarily see “inclusion” in the formal banking sector as a positive.
Financial Stability Risks
The introduction of a CBDC could also pose risks to financial stability. One major concern is the potential for bank runs if individuals perceive CBDCs as safer than traditional bank deposits. This could lead to a sudden outflow of deposits, destabilizing the banking sector and reducing credit availability.
Technological Challenges
Implementing a CBDC requires robust, secure, complex, and costly technological infrastructure. Ensuring the security of a CBDC against cyberattacks and fraud is a significant challenge. Secondly, integrating CBDCs with existing payment systems and ensuring interoperability with other digital currencies and financial technologies add another layer of complexity.
Impact on Monetary Policy
Managing the supply and demand of a digital currency would require sophisticated mechanisms to avoid inflation or deflation. Introducing a CBDC could alter monetary policy transmission through the banking system, requiring central banks to adapt their strategies and frameworks. Balancing the benefits of enhanced monetary control with the risks of unintended economic consequences is a delicate task.
Moving Ahead
As countries continue to explore and develop CBDCs, it is essential to work towards solutions that balance innovation with protecting individual freedoms and the financial system’s stability. What do you think? Are the tradeoffs worth it, or are we seeing the final nail in the coffin of financial anonymity with the decline of cash and rise of CBDCs?
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The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.
