Central Bank Digital Currencies, Part 3

In the first part of this series, I briefly talked about origins of CBDCs, how they compared with traditional means of payments and cash, and what the potential effects would be. In the second part, I talked about the costs and benefits of introducing a CBDC and the current situation in different countries around this topic.

In this final part, I will talk about current state of development achieved by several countries and what the future could bring in this domain.

The Bahamas — First in the world to launch a fully-functional CBDC

2020 was challenging, stressful, memorable, frightening, and lots more other things, but it was also the year when the Crypto world saw a public roll out of what can be considered the first fully-functional CBDC. Called the Sand Dollar, it is essentially the digital version of the Bahamian Dollar. It was issued on October 20, 2020, by the Central Bank of the Bahamas through authorized financial institutions.

It was definitely a major step forward and a remarkable achievement that is expected to deliver financial inclusion to many unbanked and underbanked individuals in the Bahamas.

It is also important to mention the evolving objectives that the project creators foresee. As stated on its official webpage — sanddollar.bs, the Central Bank is aiming to:

  • Achieve greater financial inclusion, cost-effectiveness, and provide greater access to financial services across all of The Bahamas.
  • Provide non-discriminatory access to payment systems without regard for age, immigration, or residency status.
  • Strengthen national defenses against money laundering, counterfeiting, and other illicit ends by reducing the ill effects of cash usage.
  • Increase the efficiency of the Bahamian payments systems through more secure transactions and faster settlement speed.

In my opinion, all of the objectives mentioned above are achievable through a well-designed and well-managed retail CBDC, which appears to be the case for the Sand Dollar!

Sweden — Pilot project under way with Accenture’s help

On October 15th, 2020, Stefan Ingves — the Governor of Riksbank (Sweden’s Central Bank) — published a paper about “Future money and payments.” In this paper, among other things, he discusses the gradual decrease in cash usage as evident from its share as a percentage GDP, and calls a potential e-krona (Swedish CBDC) an evolution, rather than revolution.

An important point in the potential introduction of e-krona is that a decision to issue an e-krona requires a legal basis and political support. However, even before any of those is achieved, Riksbank is already running a distributed ledger technology (DLT) pilot project with Accenture.

Consequently, Sweden might come to the stage where it already knows how an e-krona will look and function, but it still does not have the legal basis required for the decision to issue one.

China — A major global economy moves towards digitizing its cash

China has been eyeing the creation of its own CBDC since 2014 and has taken major steps towards accomplishing the task. Most recently, it has successfully completed a second CBDC pilot program. About 20 million digital yuan were spent by 100,000 residents both online and offline through participating merchants.

It is worth mentioning that there are (and potentially will be) 0% transaction fees made using the digital yuan. This fact could be a huge game-changer once the mass adoption is there, and it could squeeze or completely eliminate the commission-related profits earned by various intermediaries and payment processors.

If digital yuan is successful in a country with more than 1.4 billion people, it would set the stage for worldwide adoption of a retail CBDC, which would entail various benefits, as mentioned in my previous articles on this topic.

CBDCs & the Future

A well-designed and internationally integrated CBDC can actually simplify cross-border transactions and bring the world even closer. Many countries are already developing and piloting CBDCs. They are attractive to central banks aiming to create a more inclusive financial sector, among other reasons, and are not entirely dependent on the stage of a country’s economic development.

CBDCs carry various advantages for payment efficiency and cashless operations, but some potential drawbacks should not be overlooked. The need to balance government oversight with industry innovation will be a major concern. And, like everything in the cryptocurrency world, security and privacy will impact usability, ultimately determining their success.

CEO, CryptX Wallet. Financial adviser & lecturer at universities in France & Georgia. Featured in “Forbes 30 under 30 Georgia.” Interested in blockchain tech.