Over 100 countries are actively exploring Central Bank Digital Currencies (CBDCs)

In a rapidly evolving world driven by digital advancements, the concept of money is also undergoing a transformative shift, with Central Bank Digital Currencies (CBDCs) emerging as a possible means of revolutionizing transactions. With several countries recognizing the possible potential of CBDCs, a growing number of nations are now exploring and implementing their digital currencies.

In this line, data acquired by Finbold indicates that by the first half of 2023, 109 countries were actively exploring or engaging in CBDCs across various phases. Among these countries, 45 were involved in research, 32 were engaged in development, and 21 were in the pilot stage. Additionally, 16 countries were inactive, with 11 having already launched their CBDC projects, while two had canceled their involvement.

Elsewhere, in June 2023, the number of countries in advanced exploration phases of CBDC development, including pilot and launched stages, reached its highest level, with a total of 64 countries. This figure represents a 28% increase from the value of 50 countries in May 2022. In June 2021, the value stood at 41 countries.

Drivers of CBDCs among countries

The data highlights the considerable interest surrounding CBDCs, digital versions of traditional fiat money. The widespread recognition and success of cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) have played a pivotal role in bringing the concept of digital currencies to the forefront.

However, it is important to note that CBDCs differ from cryptocurrencies in several key ways. They are backed by central banks and function within a regulated framework and are marketed as guaranteeing stability and fostering trust among users.

The notion that the rise of cryptocurrencies and stablecoins like Tether (USDT) poses a threat to national currencies has emerged as one of the key drivers behind CBDCs. In this case, CBDCs respond to this challenge, ensuring central banks keep up with the digital revolution. Notably, institutions such as the Reserve Bank of India (RBI) have stated that CBDCs are likely to kill private cryptocurrencies such as Bitcoin. At the same time, China has advanced its digital Yuan project amid the ban on Bitcoin.

Governments are also positioning CBDCs to enhance the efficiency and safety of retail and large-value payment systems, resulting in faster and more secure transactions. For instance, CBDCs can potentially improve cross-border payment efficiency and mitigate counterparty credit risk.

CBDCs are also seen as a catalyst for accelerating the shift towards a cashless society. This transition can lead to reduced costs for central banks, improved traceability to combat vices such as tax evasion and illicit transactions, and enhanced security in fund transportation and payments. Finally, CBDCs promise to foster financial inclusion by providing access to secure savings and, eventually, credit services for the unbanked population.

Nevertheless, optimistic cryptocurrency enthusiasts have interpreted policymakers’ exploration of CBDCs as evidence that even central banks require blockchain or cryptocurrency to participate in the digital currency realm. CBDCs would probably supplant all existing private digital payment systems, irrespective of their association with conventional bank accounts or cryptocurrencies.

Criticism of CBDCs

The introduction of CBDCs has raised several concerns and criticisms. One primary concern is related to privacy and surveillance, as CBDCs could enable governments and central banks to monitor and track financial transactions, potentially compromising individuals’ privacy rights. Cybersecurity vulnerabilities also pose a risk, as CBDCs rely on digital infrastructure, making them susceptible to cyber attacks that could lead to financial instability and the theft of personal financial data.

Disrupting the existing financial ecosystem is another worry, as CBDCs may diminish the role of commercial banks and destabilize traditional banking systems. The digital versions of fiat currency could also impact traditional monetary policy tools, reducing central banks’ control over the money supply and the effectiveness of monetary policy measures. While CBDCs offer potential for financial inclusion, critics highlight the risk of exacerbating technological inequalities, as access to the necessary digital infrastructure is not evenly distributed.

Lastly, implementing CBDCs presents significant operational challenges, including infrastructure development, ensuring interoperability, and managing the transition from cash to digital currency, which could be complex and costly for governments and central banks.

Proponents of cryptocurrencies often highlight the appeal of anonymity they offer to users. However, it is worth noting that CBDC transactions could also be conducted anonymously, akin to private bank deposits in the present day. Access to account-holder information would be accessible only to law enforcement authorities or regulators when deemed necessary, a practice already in place with private banks.

Additionally, it is essential to recognize that cryptocurrencies like Bitcoin are not entirely anonymous, as individuals and organizations utilizing crypto wallets still leave a digital trace of their activities.

It is important to note that these criticisms are not necessarily insurmountable obstacles but rather areas that require careful consideration and robust solutions to address any potential drawbacks of CBDC implementation. Ultimately, the future significance of CBDCs hinges on current research and experimentation results.