This blog post will cover:
- What is CBDC?
- The most interesting cases
- Digital Yuan
- Digital Shekel
- Singapore’s CBDC
- Cross-border transactions
- What’s new in the CBDC world
We talk a lot about cryptocurrencies, but we often do not notice that the phenomenon of crypto has changed in the world’s economy. High interest in cryptocurrencies and blockchain technology showed a variety of new opportunities in finance. One of them is connected to CBDC.
What is CBDC?
CBDC or Central Bank Digital Currency is a digital token that represents the fiat currency of a particular country. It is very important to understand the key difference between cryptocurrency and CBDC. The last is centralized, and regulated and issued by the country's monetary authority.
From the point of view of a traditional banking system, cryptocurrency undoubtedly looks very threatening. Unlike some coins and tokens, Central Bank Digital Currencies is 100% backed by gold and foreign currencies, and will be used as a method of payment.
The idea of CBDC was to put together the best from fiat money, such as reliability and regulation, and crypto, such as comfort in using.
There are also some concerns about the level of control for finance operations. We know that governments are fighting against anonymity that is being so valued by crypto users. At the same time, they are obsessed with protecting people from money laundering.
The most interesting cases
A lot of countries are working on creating their own CBDC. Moreover, some are implementing technologies already. According to the statistics, 81 countries are participating in developing CBDC. 5 of them have already launched it (The Bahamas for instance) and 14 countries are trying their pilot projects.
Let’s take a look at the most famous examples of CBDC.
Digital yuan or e-CNY is created in order to redesign the Chinese payment system. It is backed by The People’s Bank of China. It’s considered to be more anonymous and secure than the traditional banking system. At the current moment, e-CNY is being tried out in several big cities, Beijing, Shanghai, Shenzhen, and Chengdu are among them. Now digital yuan is distributed by a lottery. Chinese citizens can use banking apps to apply and receive one of the red packs worth 200 yuan. Some companies already provide an opportunity for their employees to get a part of the salary in digital yuan.
Step by step China is trying out the functioning of CBDC in different areas. One of the latest developments is launching a pilot program for digital yuan in the public transportation system.
Israel has also issued its CBDC. However, the government of the country looks at the pilot program quite pessimistically. And it constantly reminds citizens that CBDC has nothing to do with cryptocurrency, it is just a variation of a payment system. The Bank of Israel (BOI) has kept the process of research and development a secret, and still is unwilling to share the full picture. So far they say that the digital shekel is based on Ethereum. The BOI has also issued a report in which it emphasizes the numerous opportunities that may be brought by CBDC.
Singapore found its own way to solve the most significant problems of creating CBDC and announced a Global CBDC Challenge. So that various organizations could propose their solutions. The results of the challenge will be summed up in November, 2021 during the Singapore FinTech week. 15 finalists will be chosen and they will receive mentorship from the people in the industry and also they will get access to the APIX Digital Currency Sandbox, a marketplace and sandbox platform that allows collaboration between FinTechs and Financial Institutions, so they could prototype their solutions.
Another interesting problem connected to CBDCs is how to make cross-border transactions. Since this is one of the most important features of the banking system, we can witness how different banks across the world are trying to make it happen.
We already know that France and Singapore are in a process of exploring cross-border transactions and even succeeded in completing some transactions.
Other countries that tried out international transactions are Saudi Arabia and the United Arab Emirates. The project’s name is “Aber”, a wanderer in Arabic. This project used a distributed ledger technology and involved central banks of two countries.
What’s new in the CBDC world
The idea of CBDC has been with us for a long time already. Countries are implementing it for various reasons, but it seems that sooner or later all of the states are joining this trend. Let’s take a look at the current situation.
So far only 5 countries have launched CBDC: the Bahamas, Grenada, Saint Kitts and Nevis, Antigua and Barbuda, and Saint Lucia.
14 countries are working on pilot projects: South Korea, Nigeria, Ghana, Jamaica, South Africa, Uruguay, Canada, China, United Arab Emirates, France, Saudi Arabia, Sweden, Thailand, and Singapore.
Not all countries are willing to participate though. Some have canceled their projects, such as Ecuador, Finland, Tunisia, Denmark, and Haiti. Some of these countries tried to implement the idea of CBDC a long time ago (e.g. Finland worked on that in the 90s), however now they have postponed the process. Chances are high that in the nearest future they will return to this path, so let’s keep an eye on them.
The most astonishing is the number of countries that have joined the research and development of the CBDC idea. Now it is about 54 countries. Undoubtedly, it does not mean that tomorrow they will launch pilot projects, but this means that it is impossible to stay out of this process, and slowly, but steadily we are moving to the world without cash.
We also know an example of a country where CBDC was not considered to be an option and it went from fiat money straight to cryptocurrency. It is El Salvador, where Bitcoin became an official means of payment.
As time goes by the interest in cryptocurrency is rising, which motivates central banks to create what they think may become a regulated alternative. Some countries are working on implementing CBDC faster than others, but all of them are combining this work with producing new cryptocurrencies regulations. In the Crypto World CBDCs are not seen as a substitution for coins and tokens, but people who are not that deep into the subject do not seem to understand the real difference between these two. Nonetheless, in a modern world transition from paper money to digital is just about time. So in the near future, we will definitely see a lot of new cases.