A CBDC is a central bank-backed digital currency issued and authorized by the central bank of a country. Nearly 114 countries are currently exploring the option of a national digital currency in the form of CBDC. According to the Bank of International Settlements, CBDC is envisioned by most as a new form of central bank money. Central banks are embracing CBDCs in an attempt to compete with private and decentralized cryptocurrencies such as Bitcoin and Ethereum.
Origin of CBDC
The first country to propose a national digital currency was China when its central bank, People’s Bank of China, began research on the digital currency in 2014 under the leadership of Governor Zhou Xiaochuan. The deputy governor of the Chinese central bank at the time, Fan Yifei, had asked central banks to take the lead, both in supervising private digital currencies and in developing digital legal tender of their own.
China became the first major economy to launch a pilot project of its central bank-backed digital currency back in April 2021, paving the way for other major economies to test run their CBDC.
Why are governments getting into digital currency?
There are several reasons why governments around the world have put development of a CBDC on a fast track in recent years. One of the common reasons for central banks to launch their digital currencies is to ward off competition from private digital currencies and stop people from using them. Other reasons why central banks are developing digital currencies is to engage in international trade without depending on the US dollar. Some central banks have proposed retail and as well international use for their digital currency in their pilot launch.
List of countries that are developing CBDC:
As mentioned earlier, there are nearly 114 countries in the world, representing 95% of global GDP, that are exploring CBDC at some capacity right now. In 2023 over 20 countries will take significant steps towards piloting a CBDC.
India – On 29 January 2021, the central government of India proposed a bill to ban trading and investments in cryptocurrencies while giving legal power to the country’s central bank, RBI, for developing CBDC. Last year, India’s finance minister announced the roll out of the Digital Rupee by 2023. India has already launched a pilot of its retail and wholesale CBDC.
Australia – The Reserve Bank of Australia (RBA) is expecting to complete its central bank digital currency (CBDC) pilot by mid-2023, according to a white paper published in September 2022. The central bank launched the pilot of its CBDC in August last year.
Brazil – The Central Bank of Brazil President Roberto Campos Neto announced that they plan to introduce a central bank digital currency (CBDC) by 2024.
South Korea – The central bank of South Korea, Bank of Korea, tested a program that allows cross-border remittances by linking different central bank digital currencies (CBDC) from other countries. South Korea has already completed the first of two phases by January and is expected to roll out a wider launch this year.
Russia – The rogue nation Russia is planning to develop a cross-border settlement system using a central bank digital currency (CBDC) by next year. Russia faced severe sanctions from the USA and other countries after it invaded Ukraine. In order to bypass these sanctions, Russia has fast tracked its process to launch its CBDC.
European Union – The European Central Bank is also expected to launch its CBDC pilot this year. Earlier, ECB chief Fabio Panetta wrote in a blog that through CBDCs, central banks “will safeguard the trust on which private forms of money ultimately depend.”
United States – In an attempt to beat China, Federal Reserve Chair Jerome Powell announced plans to publish a detailed paper on central bank digital currency, highlighting the possibility of issuing a US CBDC back in May 2021. In February last year, the Federal Reserve Bank of Boston released initial details of Project Hamilton, a potential CBDC. Though the US might have been behind in the CBDC race, it is on its way to launch its digital dollar.
UAE, Ghana, South Africa, Malaysia, Singapore, and Thailand have all launched pilot projects of their central bank-backed digital currencies.
Digital currency as a surveillance tool
The main difference between a CBDC and a decentralized digital currency is the central authority that controls the currency. When China announced its plans to launch the digital yuan, several from the crypto industry raised alarms over it. By forcing CBDC adoption, China could use its digital yuan as a mass surveillance tool to monitor each and every transaction made by people. Each digital currency transaction will leave footprints that the government will have access to.
Can we trust the government with CBDC?
Famous whistleblower and digital privacy advocate Edward Snowden thinks CBDCs could give governments too much control over citizens’ finances. While speaking at Camp Ethereal last year, Edward Snowden explained CBDC by comparing it with a cartoon show from the 1980s. “Scrooge McDuck in DuckTales had a giant vault full of coins and dollar bills and things like that. And if he needs money, a giant magnet comes out of the top of it, and it just pulls dollars out of everybody in the town’s pockets. That is what a CBDC is, right? And that’s really all it is,” Snowden said.
Former BitMEX CEO Arthur Hayes wrote in a blog post last year that CBDCs represent a full-frontal assault on people’s ability to have sovereignty over honest transactions between themselves. He warned that governments all around the world will replace physical cash with CBDC and usher into a new dystopia of financial surveillance.
Conclusion:
Majority of central banks around the world are engaging in CBDCs in some capacity. While countries like Venezuela, Iran, and Russia are primarily using it to bypass sanctions and conduct international trades, while some are looking to force them down to use as a retail currency within the country.
When China proposed its CBDC, several economists warned that the Chinese digital yuan is a weapon to destabilize the US Dollar as the world’s reserve currency. It will be interesting to see how CBDCs will coexist with decentralized cryptocurrencies.
