By James Davis
As the name suggests, a central bank digital currency (CBDC) is a digital version of a nation’s fiat currency. In this article, we will discuss why many governments are interested in creating CBDCs and discover the countries that have already launched theirs.
What are CBDCs?
Like stablecoins, CBDCs are pegged at a ratio of 1:1 with a certain fiat currency. The difference between the two is that stablecoins like USDC and USDT are issued by private firms. These companies hold the cash reserves backing the stablecoins. On the other hand, a CBDC is issued by a country’s central bank. The institution also holds the assets backing the digital currency.
How Do CBDCs Work?
Many countries developing CBDCs have adopted blockchain technology, but their central banks retain control over the ledgers. Conversely, crypto assets are decentralized without a central authority.
Central banks can use multiple ways to issue CBDCs, but they are largely deployed through mobile wallets. For example, the central bank of the Bahamas, which launched its CBDC, Sand Dollars, in September 2020, partnered with private entities to develop a mobile wallet that enabled citizens to store Sand Dollars and make electronic payments with no intermediaries involved.
Why are Governments Developing CBDCs?
In its 2021 annual report, the Bank for International Settlements (BIS) suggested that the growing interest in CBDCs is fueled by three factors: the entry of big tech companies into the finance sector, the debate on stablecoins, and the attention around cryptocurrencies. According to the report, countries disregarding CBDCs are putting their financial systems in danger, arguing that foreign tech firms will offer artificial currencies soon.
There are several other reasons prompting the need for CBDCs.
According to research conducted by the Institute and Faculty of Actuaries (IFA), a central bank digital currency helps speed up the disbursement of funds during a crisis.
Furthermore, International Monetary Fund said last year that central bank digital currencies could help promote financial inclusion since residents of a particular country would no longer be required to open a bank account to use CBDCs. A country like Indonesia, where the majority of its population lacks access to traditional finance, could benefit from the introduction of a CBDC.
Deputy Governor of the central bank of China Fan Yifel said in May 2020 that CBDCs would help reduce illegal transactions since the government would have the ability to track the movement of funds, unlike physical money, which is anonymous.
Another reason for launching a CBDC is that it will help central banks reduce the expenses of managing physical cash. According to a MasterCard report, managing physical money costs the United States 2% of its GDP.
What Countries Have Launched CBDCs or Developing One?
As of May 2023, over 90 countries, with the majority being members of the European Union, are considering developing a CBDC. More than 20 countries have already introduced their CBDCs, including Nigeria, the Bahamas, and China.
The United States is one of the countries still in the research stage. But plans for a Fed-issued CBDC have met opposition from the Republicans in recent weeks. So whether a tokenized US dollar will ever be launched remains to be seen.
Meanwhile, the China CBDC, dubbed ‘The Digital Yuan,’ has so far facilitated over 150 million since its launch. The Chinese government recently announced that public workers will soon receive their salary in the form of this CBDC.
Sweden, Cambodia, and Ukraine are still testing their respective CBDCs. Ukraine, in particular, announced a partnership with crypto firm Stellar Development Foundation but did not disclose whether its CBDC, e-hryvnia, will run on the Stellar blockchain.
The Future of CBDCs
More nations are likely going to consider developing CBDCs in the future to simplify transactions. But CBDC critics have argued that these currencies will violate privacy rights since governments can track users’ transactions. Congress Tom Emmer once said a CBDC would be beneficial if it’s open, private, and permissionless.