How Far Have CBDCs Come?

Exploring the Journey Toward Central Bank Digital Currencies and Their Implications

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By Chris Hamman

Central Bank Digital Currencies (CBDCs) recently picked up steam. Several countries have explored pilot projects with mixed success.

CBDCs have faced widespread adoption and acceptance by both financial institutions and the retail end. In others, caution and indifference are the order of the day.

The main issues are knowledge of CBDCs, how they are generally classified, what they can do, and what the future holds per adoption.

The adoption issue, though, is on a country-by-country basis. International financial institutions are still coming to terms with everything the cryptospace offers.

The IMF is Interested in CBDCs

The International Monetary Fund (IMF) has demonstrated a keen interest in CBDCs and their implementation. A recent working paper published by the institution shows efforts to help countries to build projects and encourage adoption.

Managing director Kristalina Georgieva divided CBDCs into wholesale and retail categories at the recent Milken Institute Global Conference.

Wholesale CBDCs are for banks and other financial institutions, while retail CBDCs are for everyday use.

That still doesn’t solve the questions of privacy and control. These and more are part of the issues many state legislators across America are concerned about. Several have drafted and signed laws prohibiting using a Fed-backed “digital dollar” or other CBDCs within state borders. Many are considering doing so.

Americans Have “Mixed” Concerns

There are several angles to the digital dollar discussion in the United States, with the Federal Reserve remaining on the sidelines of the issue. The Fed has a pilot project (Project Cedar) in partnership with the Monetary Authority of Singapore (MAS).

The New York Fed and the MAS, through its New York Innovation Center (NIC), published results proving that CBDC transfers across countries or currencies are workable.

Many global CBDC projects have one thing or the other to do with the Bank for International Settlements (BIS). This prompted critics to doubt the “independence” of such projects.

States across America also have different views on the CBDC issue, with an outright ban by Florida and Indiana. Other states, including Louisiana, North Dakota, and Alabama, seem to be moving in that direction.

Texas, on the other hand, is exploring gold-backed options for a state currency. Wyoming has followed in this stead but from a different angle. Gov. Mark Gordon (R) recently approved the Wyoming Stable Token Act, a precursor to deploying a state stablecoin.

Many are concerned that the Federal Government could usurp state efforts.

If state laws banning CBDCs reach a majority, federal supremacy would be out of the question.

Then again, the Federal Reserve is already preoccupied with the FedNow project, and there is a stablecoin integration in the works via a Metal Blockchain integration.

Speculations exist over an all-American CBDC, which coincides with FedNow’s July launch. The Fed has not confirmed this.

A Look at Global CBDC Partnerships

One interesting thing to note is the creation of projects that enable wholesale use cases.

The BIS is in the thick of things globally, with many pilot projects launched in their research phase or concluded from 2017 till date.

“The Bank of Canada, Bank of England, and the Monetary Authority of Singapore (MAS) launched “Project Jasper”, a four-stage wholesale CBDC project in 2017.

“Project Jura” is a joint project between the Banque de France, Swiss National Bank, and the BIS Innovation Hub alongside a group of private sector players, including Accenture, which launched in 2020.

Banque de France, JP Morgan’s Onyx Unit, and the Monetary Authority of Singapore (MAS) completed wCBDC (“wrapped” CBDC) experiments in 2021 per cross-border payments.

The Bank of England and the BIS Innovation Hub partnered to create “Project Rosalind”, a project aimed at retail CBDC transactions in 2022.

“Project Helvetia”, a partnership between the Swiss National Bank, the BIS Innovation Hub, and the SIX Swiss Exchange, launched in 2020 per wholesale CBDCs across banking networks. Successful results were announced in 2022.

The Swiss National Bank, Banque de France, the MAS, and the BIS Eurosystem Innovation Hub launched “Project Mariana”, an automated market maker (AMM) project to study deployments for Singaporean dollar, Swiss franc, and euro transfers across borders in 2022.

CBDC projects are everywhere in Asia, with the People’s Republic of China having a clear lead, though other countries aren’t far behind.

The Monetary Authority of Singapore (MAS) has partnered with just about every country that wants to lead the charge in the CBDC race, with several projects, including a multiple CBDC bridge in partnership with Hong Kong, the United Arab Emirates (UAE), Thailand, and China that launched in 2021.

In 2019, the UAE and Saudi Arabia partnered to create “Project Aber”, a joint wholesale CBDC project. The UAE recently announced a partnership with R3, a blockchain applications development firm headquartered in New York, to develop a national CBDC.

Australia just announced a successful FX transaction for its “eAUD” project that occurred on the CANVAS Ethereum Layer-2 blockchain.

China’s Digital Yuan is Mainstream

China is ahead of everyone else in the world, per CBDC development and adoption.

Starting with State Council approval in 2017 to development and testing through 2019-2021, the digital yuan has gone beta with civil service wages paid in the CBDC (recently) and adoption use cases by regional governments and other institutions occurring on a large scale.

The most recent case was the adoption of the CBDC by the Guanxi autonomous region.

The digital yuan could face challenges as other nations ramp up efforts to implement their projects.

These include India’s retail CBDC and a recent joint effort between the Bank of Korea and Samsung. The Bank of Japan (BoJ) has also entered the testing phase of its project.

Nigeria’s “e-Naira” Faces Adoption Challenges 

Despite a successful 2021 launch, Africa’s only CBDC, the “e-Naira”, has faced adoption challenges.

Built on the Hyperledger Fabric blockchain, the e-Naira should have solved payment problems faced by the populace during a recent cash crunch early in the year, but Nigerians, especially Gen Z, seemed (and still seem) distrustful of the project.

For starters, the Central Bank of Nigeria’s 2021 prohibition of cryptocurrency activities in the West African Country didn’t sit well with the youth, who make up almost half the population and a significant majority of its technologically inclined segment.

Despite efforts by the top bank to educate and inform about the benefits of the e-naira, the CBDC has failed to gain traction, and the journey toward adoption has many hurdles.

A recent IMF paper covered the adoption trends in great detail. The challenges identified include Mobile Money Operators (MMO) network penetration and Nigeria’s parallel markets, which have widened from official foreign exchange rates for almost a decade.

The success of Kenya’s M-Pesa and other FinTech projects in the East African Country could serve as a model to copy should they launch a CBDC project and a bridge developed between its CBDC and mobile money networks.

Private Firms Hold the Key to Unlocking the Potential of CBDCs

As central banks continue to tinker with CBDC iterations and platforms, the key to having a functional ecosystem is the inclusion of private firms in developing key ecosystem components.

Innovations led by private institutions paved the way for the CBDC concept as we know it (ditto stablecoins).

While CBDCs won’t replace stablecoins or vice versa, the same innovations that drive the discourse hold the key to solving many problems in the development process.

And that is the future of the industry.